v/Ps 1%65
POLICY RESEARCH WORKING PAPER 1765
Explaining Agricultural What explains differences in
agricultural and agrarian
and Agrarian Policies policies across couJntries and
in Developing Countries over time? Why do countries
in Developing Countries dpalniM ozc
adopt, and maintain, policy
regimes that reduce efficiency
Hans P. Binswanger and increase rural poverty?
Klaus Deininger What are the conditions for
countries to initiate equity-
and efficiency-enhancing
policy reforms and for these
reforms to be maintained?
These are the questions
pursued in this iterature
review.
The World Bank
Agriculture and Natural Resources Department
Office of the Director
and
Policy Research Department
Office of the Director
May 1997
POLICY RESEARCH WORKING PAPER 1765
Summary findings
Political outcomes - such as agricultural taxation, defined property rights - and the presence of
subsidization, and the provision of public goods - result organizational residues - not only reduce peasants'
from political bargaining among interest groups. Such bargaining power but may also make it more profitable
bargaining is likely to be efficiency-enhancing and for powerful groups to prefer rent seeking to productive
growth-enhancing when equally powerful interest groups activities.
- aware of the economywide budget constraint and How can these undesirable outcomes be avoided, and
know the economic implications of different policy how can sustainable policy changes be initiated?
options - participate, and when impartial institutions Experience indicates that fiscal crises of the state, often
are available to enforce decisions. The greater the triggered or aggravated by an external shock, can cause
deviation from these conditions, the greater the potential lasting changes of policies and institutions. By forcing the
for efficiency-reducing outcomes, the costs of which will state to devolve some of its power in exchange for
generally fall disproportionately on politically financial assistance to meet its immediate needs, such a
underrepresented or powerless groups. crisis can give rise to the emergence of independent legal,
Material conditions of agricultural production - such political, and economic institutions that are maintained
as spatial dispersion, seasonal work cycles, covariance of even once the crisis has subsided. External actors that
risk, and the associated market imperfections - provide resources in terms of crisis and at the same time
exacerbate the difficulties faced by small producers to enhance the scope for the politically least vocal parts of
engage in collective action. So, despite being generally civil society to participate in political discourse can have
the economically most efficient form of production, a significant impact in changing policy. The paper
family farmers' ability to counteract the political discusses in detail the implications for research as well as
influence of rural elites and urban dwellers is extremely for policy advice.
limited. Lack of independent institutions and clearly
This paper - a joint product of the Office of the Director, Agriculture and Natural Resources Department and the Office
of the Director, Policy Research Department - is part of a larger effort in the department to develop an empirically testable
model for the determination of agricultural and agrarian policies. Copies of the paper are available free from the World
Bank, 1818 H Street NW, Washington, DC 20433. Please contact Dean Housden, room S11-046, telephone 202-473-
6637, fax 202-522-3307, Internet address dhousden@worldbank.org. May 1997. (76 pages)
The Policy ResearcP Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about
development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The
papers carry tbe names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this
paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the
countries they represent.
Produced by the Policy Research Dissemination Center
Explaining Agricultural and Agrarian Policies in
Developing Countries
HANS P. BINSWANGER AND KLAUS DEININGER
Forthcoming in the Journal of Economic Literature
Table of Contents
1. INTRODUCTION .............................................................................. I
1. I UNDERSTANDNG THE THEORIE S AND MODELS ............................................................................... 3
2. THE MAIN PATTERNS OF POLICY, AGRICULTURAL GROWTH AND RURAL POVERTY ..... 6
3. IMPLICATIONS OF MATERIAL CONDITIONS AND MISSING MARKETS .................................... 9
3.1 MATERIAL CONDITIONS OF AGRICULTURAL PRODUCTION .............................................................................. 1 0
3.2 ADAPTATIONS TO MISSING AND INCOMPLETE MARKETS .............................................................................. 10
3.3 IMPLICATIONS FOR THE EVOLUTION OF PROPERTY RIGHTS ............................................................................. 13
3.4 EFFICIENCY IMPLICATIONS OF THE INITIAL ASSET DISTRIBUTION ................................................................... 14
3.5 ADAPTATIONS TO UNEQUAL LAND OWNERSHIP DISTRIBUTIONS .1.................................................... 16
4. THE IMPACT OF POLICIES ON ACCUMULATION .................................................... 17
4.1 SUPPLY RESPONSE AND PRODUCTIVITY GROWTH ..................................................... I8
4.2 PUBLIC INVESTMENT .................................................... 19
4.3 CREDIT MARKET IMPERFECTIONS AND ASSET DISTRIBUTION .................................................... 20
5. POLITICAL DECISIONMAKING .................................................... 23
5.1 POLITICAL REGIMES AND DECISIONMAKING PROCESSES .................................................... 23
5.2 INTEREST GROUP FORMATION .................................................... 25
5.3 CHOICE OF POLICY INSTRUMENTS .................................................. 29
6. THE INSTITUTIONAL AND POLITICAL ENVIRONMENT .................................................. 30
6.1 INSTITUTIONAL ECONOMICS ...................... .31
6.2 STATE FORMATION ..................... 32
6.3 CLASS-RELATIONS ..................... 38
7. THE ADOPTION OF GROWTH-REDUCING POLICIES ............................................... 42
7.1 INITIAL CONDITIONS ............................................... 42
7.2 LACK OF INSTITUTIONS ............................................... 43
8. POLICY CHANGE ................ 46
8.1 EXOGENOUS SHOCKS ................ 47
8.2 REVOLT ................ 50
8.3 FACTORS THAT ENHANCE SUSTAINABILITY OF REFORMS .................................................... 5 1
8.4 FROM TAXATION TO PROTECTION: IS AGRICULTURE A SPECIAL CASE? ...........................................................55
9. MAIN IMPLICATIONS .................................................... 57
9.1 ELEMENTS AND REGULARITIES WITH EXPLANATORY POWER .................................................... 57
9.2 POLICY ADVICE WHEN POLICIES, ORGANIZATIONS, AND INSTITUTIONS ARE ENDOGENOUS ............................ 6 1
9.3 TOWARD GREATER PREDICTIVE POWER ................................................................... 63
10. REFERENCES ................................................................... 66
FIGURE
FIGURE I THE LANDSCAPE OF THEORIES AND MODELS .................................................................. 4
EXPLAINING AGRICULTURAL AND AGRARIAN
POLICIES IN THE DEVELOPING WORLD
HANS P. BINSWANGER AND KLAUS DEININGERI
1. INTRODUCTION
The purpose this paper is to describe and, as far as possible, explain variations
in policies, programs, and institutions that influence agricultural growth, agrarian
relations, and rural welfare across developing countries and over time. It also identifies
conditions under which policy reforms meant to bring about greater efficiency and
equity are likely to be initiated and sustained. In section 1, we briefly describe the key
variations in policy, agricultural growth, and rural poverty found across the developing
world. In subsequent sections, we explore the following questions:
* Why focus specifically on agricultural and agrarian policies? We
examine the material conditions and missing markets that characterize the farm
economy in the developing world and show how these influence the agrarian structure
and institutional environment within which agricultural production takes place. We
hypothesize that the special characteristics of the farm economy also influence a
country's social and political environment, and on the political processes that determine
key policies. If this hypothesis is correct, it provides a strong justification for focusing
specifically on agricultural and agrarian policies.
* How do distorted policy patterns affect the efficiency of agricultural
production and rural poverty? We address this second set of background questions
' Hans Binswanger is senior policy advisor for agriculture and rural development and Klaus Deininger is an
economist at the World Bank. We are grateful to Xinshen Diao for important back-ground work on general equilibrium
modeling and critical input on early ideas, and to Wendy Ayres for her role as a challenging and effective editor. Yair
Mundlak and Lyn Squire made very helpful comments. This paper is a greatly condensed version of a larger literature
review from which we had to exclude many valuable contributions and references. The findings, interpretations, and
conclusions, are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or
any of its member countries.
by summarizing key conclusions from the literature on the agricultural supply response
to various policies, and the resulting impact on productivity growth. We also consider
how policy distortions coupled with imperfect and missing markets, and the unequal
distribution of wealth act together to reduce efficiency. With these background
elements we are able to start addressing the key questions explored in the paper.
* What explains the observed differences in policies across countries
and over time? Most of the essay is devoted to investigating this issue. We look
beyond agriculture because political decisionmaking involves players from all sectors.
We review the literature on political decisionmaking, and the literature on the
importance of the institutional and political environment, including approaches based on
analyses of class relations. Finally, we try to understand why so many developing
countries adopted growth-reducing agricultural and agrarian policies, and why the
policies have been so difficult to reform.
* What are the conditions and circumstances under which policy
reforms are likely to be initiated? Under what conditions would policy changes
lead to improvements in efficiency and/or reductions in poverty? And under
what conditions are the reforms likely to be sustained in a new political
equilibrium? /We attempt to answer these questions and then examine how the
factors and theories discussed in this essay can help explain why rapidly growing and
industrializing economies, such as those of East Asia, have stopped discriminating
against agriculture, instead giving it a high degree of protection.
* What elements, regularities, and theoretical insights emerging from
the literature reviewed in this essay are most likely to help explain the variations
in policies across countries and over time? How can they be used to improve
policy advice, and policymaking in developing countries? We pursue these two
questions in the concluding section.
* Then, we reflect on the future research agenda and ask how the
elements identified in this literature review can be used to build and test an improved
political economy of agriculture and agrarian relations.
2
1.1 Understanding the theories and models.
A bewildering variety of theories, models, and empirical inquiries have been
used to address these questions. We use Figure 1 as a map to locate the various
theories and models, and to structure the essay. The oval in the middle represents a
country. Exogenous influences come from nature or from other countries, and include
shocks (S), technology options (T), ideas (1), and opportunities for trade, borrowing, and
alliances with other countries (F).2
What must be explained are the variables contained in blocks and designated by
capital letters. Policy outcomes (X), which include variables such as the allocation of
rights of different groups, state organizations, and public expenditure patterns, influence
economic outcomes (Q), (such as flows and prices of output). Accumulation alters
material conditions (M)-the quantity and composition of the capital stock and the labor
force, the distribution of wealth, and the technology of agricultural production. The
political environment (P), including the nature of the state, the power of interest groups,
or attitudes and ideologies, influences policy outcomes.
Various theories and models, denoted by lower-case Greek letters, explore the
relationships between the variables. The models include static economic models (e),
accumulation models (a), behavioral theories (,B), and political decision models (7t).
Models of political economy differ according to the variables (both endogenous and
exogenous) they include and the behavioral assumptions they employ.
2 Each of the symbols represents a multidimensional vector of similar variables. For example, T refers to many
technologies.
3
Figure 1 The landscape of theories and models
S
F --- - Shocks
Foreian possibilities _ _ - _ _ Weather
Trade, borrowing, X Disasters
alliances Policy4outcomes * Extemal shocks
Marts and contrsRights
/ Politicaldecision models -nstitutions o w T
-TEconomic policies god
\ / t ~~~~~~~~~~~~Public expenditure Economic Moels
Political Environment u Economic outcomes
-Nature of the state -Fl Sows of inputs and outputs
-Interest groups \ Prices
-Markets and contracts -\/ \Economic efficiency
oAttitudes and ideologies / /\Distribution of income
/ ehaviorall m< A_/ ccum lton\
/ theories \ ~~~~~~~~~Material conditions /modl\
C ~~~~Individual>
\ SocialS -Capital and labor force Investment
\ Collective / e~~~~~~~Distribution of wealth \ -Technical change
I / \ / ~~~~~~~~~~~Technology e
Ideas - Endowments T
Ideas ~~~~~~~~~~~~~~Population Technology options
Science
Figure 1 can be summarized in the equations below. All variables and parameters
are multidimensional vectors. The endogenous variables appear as dependent variables in
some equations and independent variables in others. In empirical investigations, this
makes it difficult to establish causality. We briefly comment on this problem in the
discussion of the research agenda.
Q=Q(M,X,F, SIC) (1)
AM=AM(Q,X, M, T a) (2)
P = P (M, X, p) (3)
AX=AX(X, P, M, Q,Fl) (4)
Static economic models (E) relate political outcomes (X) and material conditions (M)
to economic outcomes (Q), such as the composition of production, prices, macroeconomic
conditions, and the distribution of income across factor owners. These models may be
partial or general equilibrium, microeconomic or macroeconomic, optimizing or mechanical.
They generally treat policies as exogenous.
Accumulation models (a) relate economic outcomes (Q) to their long-run impact on
material conditions (AM). Some accumulation models examine how investment, factor
mobility, or natural resource exploitation affect material conditions. Others try to explain
how population density, ease of market access, or the capital-labor ratio in an economy is
related to innovation and adoption of new agricultural technology. These models take the
political environment and policy outcomes as exogenous. Accumulation models have been
used extensively to analyze and estimate the economic and social cost of the distortionary
policies described above.
Behavioral theories (J3) relate material conditions (M) to the social and political
environment within which political decisions are made. Theories of collective action relate
the ability of interest groups (which are exogenously given) to influence economic
5
endowments, material conditions, and their access to, and ability to make use of
information. Analyses of institutional economics, historical materialism, and a large body of
historical literature relate the formation, nature, and behavior of states to material conditions
of production and prior political outcomes. All the behavioral models assume that self-
interest explains the participation of actors in economics or politics, and the specific policy
objectives they pursue.
Models of political decisionmaking (7c) relate elements of the political environment, to
specific policy outcomes, and the economic consequences of such policies. They consider
the behavior of political actors (benevolent dictators who maximize a social welfare function,
autocratic self-interested decisionmakers, interest groups) and the nature of voting rules
and mechanisms.
2. THE MAIN PATTERNS OF POLICY, AGRICULTURAL GROWTH AND RURAL
POVERTY
Global agricultural output has grown faster than food demand for more than a
century. Over the same period the proportion of the population deriving a livelihood from
agriculture has declined, real food prices have fallen, and-in many countries-the
proportion of rural households living in poverty has fallen (World Bank 1990 and 1996). But,
there has been great variation among countries and regions in output, productivity, and rural
welfare, with some experiencing large improvements and others experiencing stagnating or
even declining output, productivity, and rural living standards. These variations and their
relationship to government policies and other factors must be explained.
Agricultural policies in developing countries are often highly distorted, as the
literature documents. Krueger, Schiff, and Vaides (1991), in characterizing policy mixes for
eighteen countries from 1960 to 1983, found that:
*Most of the countries imposed high taxes on their agricultural sectors.
.The indirect tax on agriculture from macroeconomic policies, such as overvalued exchange
rates, and measures such as import duties and industrial protection, was three times
the direct tax, such as export taxes, on agriculture.
6
*Most of the direct measures were contrary to the country's long-term comparative
advantage-for example, competitive commodities were taxed, while uncompetitive
(often food) crops were protected.
*Resources provided to agriculture, through measures such as subsidized credit,
infrastructure, research and extension, were not equal to resources extracted.
oThe resources that did flow to agriculture almost exclusively benefited large, modern
enterprises, not the many small farmers who, together with landless workers, were
most affected by the net taxation of agriculture.
Still, among the eighteen countries included in the study, performance of the
agricultural sector in terms of growth and poverty reduction varied widely depending on the
country's agrarian structure, macroeconomic environment, and provision of public goods to
the farming sector. The countries fall into four main groups, depending on their agrarian
structures and the policies they pursued.
First, based on an agrarian structure consisting predominantly of family farms, the
major Southeast Asian countries-Indonesia, Malaysia, and Thailand, following the earlier
lead of Taiwan and Republic of Korea-and China reduced agricultural taxation in the
1970s and started to support smallholders. These countries, in addition to establishing
favorable macroeconomic policies, invested in rural infrastructure and social services,
provided research and extension services, and supported viable smaliholder credit systems.
Agricultural output grew rapidly, and the number of rural households living in poverty fell
dramatically. The experience of China illustrates the enormous impact that agrarian and
agricultural policies have on agricultural output and productivity. In 1978 China abandoned
collective agriculture; assigned most agricultural land to families, giving each a very small
holding; and sharply increased the prices paid for agricultural goods. Over the next fifteen
years farm output grew at a rate of more than 6 percent a year. This dramatic increase in
agricultural productivity precipitated China's long-running economic boom, which continues
today.
A second group of countries, including Argentina, Ghana, Nigeria, Tanzania,
Uganda, Zambia, and many other African countries, also had agrarian structures dominated
7
by family-farms. However these countries discriminated heavily against agriculture by
maintaining overvalued exchange rates, industrial protection, and export taxation. In
addition, they provided little support to agriculture, and the support they did provide went
primarily to relatively inefficient, but politically powerful large producers. Except in regions
with especially favorable agricultural conditions, agricultural output has not kept up with
population growth, and rural poverty has increased sharply. Although many of these
countries have recently initiated macroeconomic stabilization programs and structural
reforms, they are reforming agricultural policies, with some notable exceptions, only slowly.
A third group of countries-including India, Kenya, Mexico, and the Philippines-with
agrarian structures that comprise large estates formed during colonial rule also imposed
heavy taxes on the agricultural sector through unfavorable policies, such as an unsupportive
regulatory environment, dominance of parastatals, exchange rate restrictions, and import
barriers. But these countries also partially compensated for these unfavorable policies by
implementing large public investment programs in rural areas and partial land reform
programs, which addressed structural problems. This combination of policies has resulted
in modest increases in agricultural output and modest reductions in rural poverty. Rent
seeking by large farmers and bureaucrats has, however, often reduced the efficiency of
public spending, which has steadily shifted from investment in public goods (for example,
irrigation) to distortionary subsidies for privately used inputs (for example, water and
electricity), eroding the basis for long-term growth. Reforms of these public expenditure
patterns have begun only recently and are being implemented slowly.
A fourth group of countries-including Brazil, Colombia, Guatemala, and South
Africa-has been characterized by a very unequal distribution of land-with Gini coefficients
that are uniformly higher than 0.8 (often with 2 percent of farmers holding 33 percent of the
land)that dates back to colonial times., The unequal distribution of land was worsened by
a policy mix that taxed the agricultural sector directly and indirectly through industrial
protection and overvalued exchange rates. To compensate, rural elites were favored in the
I The Gini coefficient measures the degree of inequality in a distribution. A Gini coefficient of zero implies a
perfectly equal distribution whereas a coefficient of 1 implies perfect unequal distribution, with one unit holding everything and
all others holding nothing.
8
allocation of property rights, public investment, services, credit, and subsidies. Although
governments sometimes made efforts to redistribute land in response to rural unrest and
violence, the programs were poorly designed and consequently achieved little. To the
contrary, because they discouraged tenancy (by restricting property rights or by raising fear
among landowners of future land reform), or explicitly prohibited tenancy, the land reform
programs often led to the evictions of large numbers of tenant farmers, whose loss of
income more often than not outweighed the gains achieved by poor farmers.
Although agricultural output grew rapidly in these countries until the mid-1980s, rural
employment did not grow enough to keep up with population growth-because by
subsidizing credit, governments encouraged large farmers to purchase farm machinery,
which displaced labor. Agricultural growth largely stopped after governments stopped
subsidizing credit in the mid-1980s with the onset of the fiscal and debt crises. Structural
problems, manifested in widespread rural poverty and rural violence, again demand
attention.
3. IMPLICATIONS OF MATERIAL CONDITIONS AND MISSING MARKETS
It is impossible to consider the consequences of agricultural policies in isolation from
general macroeconomic conditions and policies affecting other sectors. But it makes sense
to investigate the key factors influencing agricultural policies separately, since the material
conditions of agricultural production and the specific imperfections of financial, insurance,
and factor markets in rural areas can explain many observed regularities.4 We first identify
the special characteristics of agricultural production and their consequences. We then
investigate the way policies interact with market imperfections to produce efficiency- and
growth-reducing outcomes. Finally, we explore whether and how material conditions can
help explain policy choices and distortions.
4 This section draws heavily from the large literature on tenancy and sharecropping recently reviewed for the Journal
of Economic Literature by Otsuka et al. (1992) and the literature on agrarian relations and land markets as reviewed by
Binswanger, Deininger and Feder (1995). As the purpose of this section is to set the scene rather than provide a detailed
discussion, we refer the interested reader to these references for a more elaborate argument and a borader set of citations.
9
3.1 Material conditions of agricultural production
Agricultural production is characterized by heterogeneity, seasonality, and spatial
dispersion, and by large variations in weather and prices that affect similar producers within
a region in the same way- implying that their incomes are covariant. These characteristics
aggravate the problems caused by well-known informational asymmetries which
characterize contracts for insurance, credit, and labor. Covariance and informational
asymmetries, have major consequences for financial and insurance markets: crops usually
cannot be insured against loss (Hazell, Valdes, and Pomareda 1986), and rural financial
intermediation and credit markets develop slowly and with great difficulty (Binswanger and
Rosenzweig 1986). Spatial dispersion, heterogeneity, and seasonality imply that hired
labor, which does not share in profits, must be closely supervised-and supervision costs
are exceptionally high. s
These special features of rural areas give rise to three main consequences. First,
many of the institutions in rural areas have developed in response to specific material
conditions and the resulting imperfections in financial, insurance, and labor markets.
Second, fully privatized land rights may not be the most efficient arrangement for rural
economies that are characterized by highly incomplete markets. Third, the way in which
rights to productive assets, especially land, are allocated affects not only the distribution of
income in rural areas, but also the overall efficiency of the rural economy.
3.2 Adaptations to missing and incomalete markets
Missing or incomplete markets can explain many of the characteristics of rural
societies.6 Subsistence orientation, reliance on family labor, and the use of land and cattle
(or other assets) as savings instruments can be explained as the consequence of the
I Empirical evidence regarding the supervision costs of agricultural labor can be found in Dong and Dow (1993) and
in Frisvold (1994). Imperfections in financial markets, especially if coupled with impediments to the functioning of the land
rental market, can counter this advantage and may, in practice, still lead to the appearance of a positive relationship between
farm size and yields (see, for example, Kevane 1996).
6 Some analysts have argued that peasants do not maximize profits. This controversy over a distinct "peasant
rationality" has largely disappeared, and peasant behavior is now modeled as utility-maximizing in settings characterized by
high risk and imperfect markets.
10
absence, or poor development of markets for products, labor, finance, and risk diffusion
(Binswanger and Rosenzweig 1986, Binswanger and McIntire 1987).
Agrarian structure. Many studies of farming systems around the world have shown
that there are few economies of scale in agriculture that might provide advantages to farms
larger than what a family could operate using its own labor (van Zyl, et al. 1995).7 The lack
of economies of scale in agriculture, coupled with the high cost of supervising wage labor,
implies that a farm cultivated by an owner-operator without reliance on permanent outside
labor-the family farm-is the most efficient unit of production. The few exceptions occur
with plantation crops, or where large farms are able to overcome imperfections in other
markets, such as those for outputs, inputs, or credit.8
The degree to which covariate and noncovariate risk can be diversified has important
implications for equity as well as productive efficiency. Where markets are not well-
integrated, prices can vary considerably in response to covariate shocks such as droughts,
leading to distress sales of assets at very low prices. Such sales leave the seller with
insufficient resources to purchase the assets back later when prices return to normal (Cain
1981). These circumstances can lead to the concentration of land holdings even where
large holdings are less efficient than family farms. The inability to insure against the risk of
loss can lead to the use of assets such as draft animals to facilitate consumption smoothing
during periods of crisis (Rosenzweig and Wolpin 1993).
' The optimal scale of family farms varies widely ammong and within countries, depending on climate and soil
fertility, population density, access to markets and infrastrucutre, the opportunity cost of family workers and operators in the
urban economy, and the technology available.
8 Many technical economies of scale can be circumvented by rental markets for machines. Other economies of scale
in marketing and credit can be circumvented by village traders, cooperative societies, and contract farming. Managerial
economies of scale can be circumvented by extension services or cooperatives. Thus the worldwide prevalence of the family
farm suggests that the superior incentives of family members to invest and work hard typically dominate these sources of
economies of scale. Exceptions can occur with plantation crops. These are characterized by the occurrence of economies of
scale in processing or shipping a highly perishable crop, which leads to a coordination problem between the farm and the
plantation. This problem can be solved either by combining the two operations in a single enterprise, or through contract
farming. Thus we see very large farms producing sugarcane, bananas for export, tea, and palmoil. For all these commodities
the share of output from plantations has declined in recent decades compared with the share from contract farming (Binswanger
and Rosenzweig 1986). Another exception occurs when there are virtually no markets for inputs, outputs and credit, as has
been the case in transition economies. Families are then understandably reluctant to bear the risks of private farming,
preferring the safety of producing as part of large enterprises that can provide some of these services.
1 1
Sharecropping can be viewed as a way to allocate land to efficient family operators
in places with unequally distributed landownership, high environmental risk, and imperfect
credit markets. Although a less efficient system of production than owner operation or
fixed-rent tenancy, sharecropping provides tenants with partial incentives to work hard and
invest, which wage labor contracts do not.s
Social characteristics. Characteristics such as the role of elders in the management
of production and food stocks for large extended families have similarly been explained as
adaptations to high environmental risk, low population density, and the ensuing isolation
from interregional markets (Meillassoux 1981). Spatially diversified social networks, created
and maintained through migration and marriage, help insure against covariate risks and
prevail as long as less costly mechanisms to insure against such risks are unavailable
(Rosenzweig and Stark 1989).
In many cases, however, farmers are forced to resort to second-best strategies-not
because of the unalterable material characteristics of the productive environment and the
associated market imperfections, but because of government policies. The patron-client
relationship is an instructive example, being considered a relatively beneficial insurance-
substitute in the neoclassical tradition, but as a sophisticated form of exploitation in Marxist
theories (Hayami and Kikuchi 1984; Scott 1976; Bhaduri 1986). Determining which
interpretation is valid requires an examination of the policy and institutional framework within
which these relationships are adopted.1o
9 Numerous empirical studies have shown that legal prohibition of sharecropping as "feudal" does not lead to the
choice of fixed-rent tenancy, but rather to further restrictions in small farmers' access to land (see Binswanger, Deininger, and
Feder 1995). Restrictions then lead to further efficiency losses and increased poverty, as in the group of countries with
dualistic land ownership patterns. Sadoulet, Fukui, and de Janvry (1994) are unable to find a significant effect of
sharecropping, compared with owner-operators, for sharecroppers who are poor, face high risk, or have established long-term
relationships with their landlords. Shaban (1987), who through the use of panel data adjusts not only for soil quality but also
for individual ability, finds that the efficiency loss attributable to share tenancy is modest: about 15 percent.
'° In the United States south the need to maintain a loyal and cheap labor force led large landowners to actively and
fiercely resist attempts to replace a paternalistic system, under which they provided some insurance and protection to their
employees, with systems giving workers access to state-provided benefits such as social security. Not until the invention of the
cotton picker, which mechanized the cotton harvest, was social security extended to the south (Alston and Ferrie 1993).
12
3.3 Implications for the evolution of property rights
Property rights assign the rights to and rewards from resource use to individuals,
thus providing incentives to invest in resources and use them efficiently (Alchian and
Demsetz 1972). Given the high cost of supervising wage labor, clearly allocating land rights
to owner-operators would generally increase the efficiency of agricultural production.
However, in environments where information costs are high and markets for finance
and insurance are imperfect, private property rights do not always produce the most
efficient farming arrangements. Abandoning communal land rights for fully tradable
property rights may lead to the loss of safety nets for the poor, the use of economies of
scale in herding, or measures to diversify risk (Jodha 1992; Nugent and Sanchez 1993;
McCloskey 1991). Furthermore, the process of assigning and transferring private property
rights is not cost-free. The costs of maintaining records, negotiating, contracting, and
policing property rights can be high and may exceed the value of the land, especially in rural
areas with low population densities and little market access.
Communal types of land tenure assign to community members clear inheritable
userights to cropland, pastures, forests, and fisheries, and usually allow some degree of
exchange (rental or even sale of land) within the community. They often provide security of
tenure at low cost, and thus do not discourage individuals from investing in the operation
(Migot-Adholla, et al. 1991; Bruce and Migot-Adholla 1994). Since the use of the land and
its output belong to individual cultivators, communal property rights systems rarely lead to
large static efficiency losses-unlike collective farming systems.11 Fully individualized
property rights systems become superior to communal systems only once population
growth and specialization increase the value of land and the efficiency losses associated
with restricting transactions to insiders.
" The supervision and monitoring cost advantages of family farms seem to be at the root of the preponderance of
assignments of land to, and production by, individual families. Collective production of crops is very rare, and cropland is
almost always assigned to families on a temporary or permanent basis. Communal use is usually restricted to noncropped
forest or pasture areas.
13
3.4 Efficiency implications of the initial asset distribution
It is well known that in many countries land prices exceed the capitalized value of
farm profits (Binswanger, Deininger and Feder 1995). In periurban areas, where land has
many alternative uses, this is not surprising. Yet the phenomenon is prevalent even far
from cities, because, in addition to the profit stream available from farming, land provides
other services to the owner, which are capitalized into land prices. Where insurance
markets are imperfect (because of the combination of covariance and moral hazard
problems), land provides value as collateral. Land provides additional services, serving as
an inflation hedge, a tax shelter (due to the preferential treatment of agriculture in income
and property tax systems), and collateral to obtain access to subsidized credit (Just and
Miranowski 1989; Brandao and Rezende 1989; van Schalkwyk and van Zyl 1996).
Where land prices exceed the present value of their income streams, poor farmers
cannot buy land, even if they have access to credit at the prevailing interest rate. To pay for
the land with a loan, poor farmers must reduce their consumption below what they can
sustain as workers or sharecroppers. Or, they have to use nonfarm income to service a
part of the debt even in normal years. Thus people need savings or nonfarm income to
acquire land. And this need tends to make the distribution of land holdings more unequal.
Even without macroeconomic instability or policy distortions, rural land markets have
special characteristics. Where nonagricultural opportunities for rural residents are limited,
little land is offered for sale during periods when the weather is normal. Landowners are
made better off by selling land only if they are able to earn a higher return from the sales
proceeds than from cultivation or rental.12 Therefore, rural land sales are likely to be
concentrated in years when profits are low because of adverse weather or low commodity
prices, and take the form of distress sales. Since farmers in the same area are affected by
the same conditions, the sales will often be to moneylenders or other creditors whose
'2 Mortgaged land cannot be used as collateral for working capital. Thus the owner of mortgaged land cannot reap
the production advantage of ownership, and thus will be unable to repay the loan out of increased income from the land. Only
unmortgaged land yields a flow of income and other services, the present value of which equals the land price (Feder et al,
1988) Since only unmortgaged land provides these services, land purchases are likely to be financed out of household savings.
14
assets are their outstanding loans.,a Thus even without macroeconomic or policy
distortions, land holdings may become concentrated in the hands of moneylenders, large
landowners, people with urban incomes, or others with financial resources.
Does this matter for efficiency? Land rental or sharecropping could equalize the
marginal product of land, labor, and capital in production among land holdings. But these
contracts are second-best adaptations to market imperfections and are still less efficient
than owner-operated farms. The initial distribution of land or wealth will thus influence
subsequent allocation of factors of production and has important consequences for the long-
term productive capacity of the rural economy. Moral hazard, covariance of income, and
collateral value of land imply absent insurance and imperfect credit markets. Markets for
land may therefore fail to bring about Pareto-improving trades and an efficient farm size
distribution-an illustration of the second-best.
The powerful impact of initial land allocations on subsequent agricultural
development can be illustrated by comparing land allocations in the United States West and
in Brazil in the late nineteenth century. In the United States the Homesteading Acts limited
the size of plots that families could acquire to 160 acres. To retain ownership rights,
individuals were required to cultivate the plots for a specified number of years. Owner-
operated farms dominated agricultural production, with rentals and sales merely reallocating
land to more efficient farm families working plots of comparable size. United States
agriculture became one of the most productive systems in the world, and remains so today.
By contrast, in most of Brazil land could be titled only in lots no smaller than four square
kilometers (988 acres)-an area much larger than a family could work. Restrictions on
subdivision kept landownership highly concentrated. As a consequence, Brazilian
agriculture became dependent on wage labor and was characterized by relatively low
efficiency and investment. Investment and productivity rose only after government-
sponsored import substitution policies and credit subsidies brought about rapid
1' These financial intermediaries retain the property in their portfolios, sometimes renting it to the very farmers who
sold it, until land prices improve with the return of normal weather.
15
capitalization of the sector. Land sales have been unable to reduce significantly the
inequality in the size distribution of holdings.14
3.5 Adaptations to unequal land ownership distributions
Because supervising hired labor is costly, large farms run with hired labor will
generally be less efficient than small farms and will not be able to offer owner-operators
sufficiently aftractive contract terms to induce them to give up their own operations. In the
past, where population densities were low, large estates therefore faced severe problems
recruiting workers or tenant-farmers. Policies were often adopted to reduce the profits of
family farms and therefore the reservation utilities of their operators. These policies
included eliminating rights over high quality land; prohibiting the subdivision of large estates;
imposing lump-sum taxes on individuals, huts, and labor; restricting the marketing of output;
and prohibiting the production of lucrative crops (see section 5.2 for further discussion). In
many countries these policies remained in place even after population growth had
eliminated labor shortages. They contributed to inefficiency, stagnation, and rural poverty.
Two predominant types of arrangements arose to reduce the inefficiencies of very
unequal ownership distribution of land. First, in landlord estate systems owners leased their
land to tenants who worked the land with their family's labor. Most commonly, the
arrangement was sharecropping, a second-best adaptation to the material conditions and
market imperfections of agriculture. Most landlord estate systems have now been
eliminated through land reform programs. Obtaining title to the land they worked provided
former tenants with incentives and resources to invest in physical and human capital,
greater security against exogenous shocks, and often an increased ability to participate in
the political process (Grabowski 1994).
Second, in hacienda systems characteristic of many South American and African
countries, tenants were allocated just enough land to satisfy their subsistence requirements
14 Not only were financial and insurance markets absent or distorted, during the twentieth century a combination of
macroeconomic instability, tax preferences for agriculture, and credit subsidies for large farmers drove land prices above the
present value of farm profits, further reducing the ability of the sales market to bring about an efficient distribution of
operational holdings (Binswanger and Elgin 1988; Brandao and Rezende 1989).
16
but were required to work on the owner's part of the farm, usually to produce crops for the
market. These systems were not only less efficient than landlord estates, but also evolved
less favorably (de Janvry 1981). Land reforms, where they occurred, often resulted in state-
farm or collective-farm structures, which provide very poor incentives for work and
investment, and rarely lead to increases in productivity. In most places, however, the fear
of impending land reform prompted landowners to reduce their dependence on hired or
tenant labor through large-scale evictions. Owners then either mechanized their farm
operations, often with the help of generous government subsidies, or converted their farms
to undertake extensive livestock ranching, which requires very little labor. In many
countries, with so many rural laborers unemployed, wages for all unskilled workers fell,
worsening rural and urban poverty.
In the remainder of the paper we will often refer to the special material and
informational characteristics of agriculture; the difficulties with output, labor, financial, and
insurance markets that they imply, and how they change in the course of development. We
have seen that they are very important influences on the organization of production,
peasant behavior, and the interaction among the allocation of property rights, contractual
freedoms, and the efficiency of production. It would not be surprising to observe that these
conditions also affect accumulation processes, such as technical change, and the political
environment within which policies are decided.
4. The impact of policies on accumulation
In order to appreciate the full impact of the policy patterns discussed in the first
section on rural growth and welfare, it is necessary to understand the impact of policies on
accumulation: investment in physical and human capital, the conservation and sustainable
use of natural resources, and the pace and direction of technical change. Accumulation
processes depend on the provision of complementary public goods and infrastructure, and
may therefore be influenced by the quantity and quality of public goods provided to
agriculture and rural areas. The prevalence of market imperfections in rural areas, and the
far-reaching effects these have on incentives and abilities to accumulate will increase the
17
importance of initial asset distributions in determining agricultural productivity and rural
poverty.
4.1 Supply response and productivity growth
Sustained growth of agricultural productivity is contingent on the generation of new
technologies through research and investment in human and physical capital-fostered by a
policy environment that provides private agents with incentives to engage in these activities.
Policies that discriminate against the agricultural sector will thus have long-term
consequences for agricultural growth and rural poverty, in addition to their static effects.
One reason why it has been easy to adopt policies that discriminate against all or
part of the agricultural sector is that the short-run supply response of aggregate agricultural
output is inelastic, much more so than that of other sectors (Johnston 1 960).l5 This inelastic
supply response allows myopic politicians to implement agricultural policies without being
fully aware of, or concerned about their ultimate deleterious effects on supply and growth.
While the short-run supply response of agriculture is inelastic, the long-run response
is highly elastic, as the literature unambiguously shows.16 The literature also shows that the
agricultural sector adjusts to changes in the intersectoral terms of trade through individual
investment and migration decisions that have relatively long gestation periods. In the long
term declines in the rate of investment will reduce the rate of change in the implemented
technology used, thus reducing productivity and growth (Mundlak, Cavallo, and Domenech
1989). Policies thus have much larger and far-reaching long-term consequences than
implied in comparative static models.
Boserup (1965) describes in great detail the ways in which population growth has
historically led societies to invest in land improvements and irrigation facilities, to intensify
land use, and to adopt new technologies that resulted in higher sustainable agricultural
IS This is because many of the factors of production are highly sector-specific and therefore not very mobile in the
short run.
16 The inelastic short-run supply response of the agricultural sector is not a result of inherent backwardness or
irrationally backward-bending supply curves that would allow the state to extract almost unlimited "vent for surplus" without
affecting long-term productivity, as was long believed by Marxist scholars.
18
production per unit of land. But, not all societies experiencing population growth and
increased market access have shown growth in agricultural productivity, suggesting that
these responses are not automatic. Policies discriminating against agriculture, or parts of
the farm economy, for example, small farmers, are likely to slow the evolution of farming
systems. Take for instance the cases of Kenya and Ethiopia (Heath and Binswanger 1996).
In Kenya (Machakos District), farmers enjoyed secure land rights, access to infrastructure
and markets, fairly favorable terms of trade, and cash income from sales of crops or labor.
A fourfold increase in the rural population over sixty years was more than compensated for
by output growth and investment in land conservation. Ethiopia, on the other hand, lacked
the institutions, policies, and infrastructure favorable to farmer investment. A national cross-
section showed that high population density is associated with soil degradation.
Getting policies right is even more important for agriculture that uses modern
technology, since the growth of total factor productivity can take place in different ways. By
responding to factor scarcities, induced technical change is directed toward products or
factors that are most efficient for a particular economy (Hayami and Ruttan 1985).17 If factor
prices are distorted, technical change may not occur or may be inappropriate for the
economy, given its factor ratios. Either would have negative implications for efficiency and
growth.
4.2 Public investment
It has long been known that the potential returns to private investment, and thus its
attractiveness will be affected not only by price policies but also by complementary
investment in public goods, such as education, infrastructure, basic science, and
dissemination of technology. However, despite long-standing empirical evidence that
strongly suggests public investment in these areas generate high returns, the patterns of
" The induced-innovation hypothesis remains controversial, despite the large body of historical evidence that supports
it, especially from agriculture. It is felt that the theory lacks a solid macroeconomic foundation, despite the fact that such a
foundation has existed for more than twenty years. In addition, many have argued that it is empirically impossible to
distinguish between ordinary factor substitution and biases in technical change (Diamond, McFadden, ansd Rodriguez 1978).
This is so even though the problem has been resolved theoretically by Sato (1970) and empirically by Binswanger (1974) for
the United States, using panel data to estimate the underlying substitution parameters and then applying these to aggregate
historical data to compute the factor biases residually. For a recent discussion of the controversy, see Ruttan (forthcoming).
19
public spending observed in many developing countries are not oriented appropriately.
Many countries still neglect primary education, especially in rural areas, and provide
disproportional subsidies to higher education that benefit the better-off (Schultz 1988; van
de Walle and Nead 1995). A large number of studies have consistently found exceptionally
high returns to publicly-funded agricultural research. Despite increases in public
expenditures in developing countries on agricultural research, studies suggest that rates of
return to agricultural research (Evenson and Westphal 1995) and smaliholder extension
(Birkhaeuser, Evenson, and Feder 1991) are still well above those for other
investments-suggesting that countries continue to underinvest.
While skimping on these high-return investments, governments have often spent
large amounts on nonproductive activities with low returns, such as untargeted producer
and consumer subsidies. The literature describing urban bias (Lipton 1977, 1993) provides
qualitative evidence that government investment has often favored the rural elite and the
urban upper and middle classes rather than the small family operator. A number of recent
studies investigating returns to public investment in different sectors demonstrate that public
investment in many developing countries is focused on sectors, such as state-owned
enterprises and large-scale agriculture, in which state involvement may crowd out private
investment. These investments have not, for the most part, brought about significantly
higher growth, and may even have reduced growth (Easterly and Rebelo 1993; Devarajan,
Swaroop and Zou 1996).
4.3 Credit market imperfections and asset distribution
In the presence of information deficiencies individuals lacking wealth for collateral
may be unable to purchase or lease indivisible assets. They are unable to borrow, not
because they are intrinsically less productive, but because the agency cost (the cost of
supervision and monitoring) of lending to them is prohibitive (Hoff and Lyon 1994).1" These
problems are particularly severe in rural, as compared to urban, areas, where imperfect
Is Local lenders can acquire information about the creditworthiness of their borrowers and the risks associated with
the projects undertaken by them at relatively little cost. Their ability to diffuse risk is, however, very limited. Thus the
transaction costs associated with loans for agriculture are high (because of the high reserve ratios required) even in the
informal sector, as confirmed by a large number of empirical studies.
20
insurance markets, spatial dispersion and covariant incomes add to the difficulties of
obtaining access to credit.
The theoretical literature suggests that in the presence of credit market constraints
and indivisible investments, the initial distribution of wealth affects aggregate output and
investment in the short run and the long run. Different initial distributions of assets are
associated with very different, but dynamically stable steady states (Chatterjee 1991;
Tsiddon 1992). Societies in which a relatively equal initial distribution of assets allows a
large number of individuals to make lumpy investments that enhance productivity may reach
permanently higher rates of growth than those in which the highly unequal distribution of
assets prevents such investment. This outcome has several implications that are important
for agrarian relations and rural welfare.
First, if schooling effectively compensates for capital market imperfections, then a
policy of compulsory education could generate high social payoffs, in addition to producing
21
immediate gains in productivity.19 A policy requiring schooling could make the distribution of
income more equal and lead to permanently higher economic growth (Eckstein and Zilcha
1994).
Second, policies that facilitate consumption smoothing in risky environments may
positively affect on productivity by eliminating producers' need to liquidate their stocks of
productive assets, such as draft animals or land, at distressed-prices (Rosenzweig and
Wolpin 1993; Cain 1981).
Third, allocating public expenditures to urban areas or large farmers who are
politically vocal-practices that have been widely followed in developing countries-does
not help the rural poor gain access to credit. Rather, it undermines their ability to operate
as family farmers, therefore increasing inequality, and also reduces productivity and long-
run growth (Bencivenga and Smith 1991).
Fourth, where rural capital markets are highly imperfect and the distribution of wealth
is unequal, a one-time redistribution of wealth, such as a land reform, may largely eliminate
the need for distortionary redistributive policies later. More importantly, it may also alter the
equilibrium growth path of the economy and lead to permanently higher levels of growth
(Banerjee and Newman 1993; Chatterjee 1991). This outcome is consistent with the land
reform experience in East Asia and suggests that, despite the greater difficulties of carrying
out land reform in the remaining hacienda systems (see section 2.4), doing so would likely
generate considerable social benefits.
Given their impact on accumulation processes, the welfare and equity costs of
distortionary agricultural policies are likely to be very large. Why are such policies adopted?
Why do they persist? Why have so many countries persistently pursued agricultural policies
and expenditure patterns that inhibit efficiency and growth, waste natural resources, and
harm large segments of their populations? And why have the people who are made worse
19 One example would be to counteract the market imperfections with a government loan scheme that finances
primary education on a voucher basis. The high income elasticity of demand for education and health care, as demonstrated in
a number of recent studies, for example, Squire (1993), suggests that eliminating the constraints that prevent investment in
human capital and providing economic opportunities to use this human capital, may be associated with high payoffs in terms of
a more equitable distribution of wealth.
22
off with such policies, such as small agricultural producers, rural workers, or consumers,
often been unsuccessful in changing them? To answer these questions, we must consider
the issues related to political decisionmaking and institution formation, depicted in the left-
hand side of Figure 1.
5. Political decisionmaking
We first consider whether differences in political regimes and decisionmaking
processes can explain variations in policy outcomes (equation 4), independently of how
such differences come about. Under ideal conditions a variety of political decision making-
processes can lead to efficiency- and growth-enhancing policy mixes. The fact that many
countries have not experienced sustained growth suggests that these ideal conditions have
rarely been satisfied. It is thus necessary to identify the critical deviations from ideal
conditions, the reasons for such deviations, and their likely impact on policy outcomes.
5.1 Political regimes and decisionmaking processes
Models of political decisionmaking processes have been based on three main
assumptions: a social planner maximizes a social welfare function, an autocratic ruler
maximizes dynastic wealth, or democratic decisionmaking processes make the median
voter decisive. Under ideal conditions all of these systems can be consistent with the
maximization of efficiency and growth (Lal 1993; Olson 1990, Squire 1993).
The three decision rules can also be viewed as special cases of interest-group
equilibria, in which where interest groups use resources to influence policy outcomes.
Competitive lobbying by interest groups can, under certain conditions, lead to the adoption
of policies that raise output and efficiency. This is because such policies produce gains
rather than deadweight costs, so that the groups which benefit have an intrinsic advantage
over those harmed (Becker 1983, 1985).
The first condition holds that politicians act as impartial arbitrators rather than self-
interested players. The state is stable. Interest groups are predetermined and equally able
to use "pressure production technologies" that transform resources (such as labor and
capital) into political influence.
23
Second, the costs of "influence production" (including the deadweight losses
associated with redistributing resources) are assumed to be convex in the amount of
resources redistributed.2a Also, all participants have perfect information, thus being fully
aware of the increasingly distortionary effects of additional redistribution.
Third, an aggregate budget constraint allows decisionmakers to increase public
expenditures only by imposing additional (explicit or implicit) taxes on citizens. The intuition
behind this third condition is straightforward: if all groups have full knowledge of policy
impacts and are equally capable of influencing policies, none will agree to policies that
increases another's utility without also increasing its own. They will agree only to the
provision of public goods that increase aggregate welfare (for example, infrastructure or
agricultural research).
Although these ideal conditions rarely hold, considering them can still provide
important information on what might happen if certain conditions are not met. For example,
pressure groups with poor pressure production technologies, or few resources to employ
their technologies would clearly be heavily taxed. If acquiring information is costly and
groups can spread misinformation or appeal to ideologies in order to conceal the true
effects of policies, this could lead to the implementation of policies that benefit politically
powerful groups while reducing social output. The presence of self-interested politicians
whose survival in office may depend on the short-term benefits they provide to vocal
constituencies adds further complications. Thus investigating the consequences of political
processes under ideal conditions is unlikely to be useful in explaining the variations in
agricultural policy regimes discussed in section 1.1. Instead we focus on the differences in
political environments within which pressure groups form and interact. First, we look at the
factors which effect interest groups' abilities to organize politically and use informational
advantages (equation 3). We then turn to the political environment and its implications for
policy outcomes (equation 4).
20 Convexity implies that deadweight losses increase more than proportionately with the amount transferred and that
the most efficient method of redistribution, that is, the one generating the least amount of resistance, will be chosen. In a
number of important cases this assumption does not hold, although-in the absence of coercion or discrimination-the cost of
redistribution is generally convex.
24
5.2 Interest group formation
If interest groups cannot be taken as exogenously given, we need to pay attention to
the factors that foster their formation (as indicated in the lower left hand quarter of Figure 1).
Interest groups provide members with goods and services that have public-good
characteristics, including information, marketing and other services, and lobbying for
policies or programs favorable to its members. However, the provision of public goods is
associated with a free-rider problem: individuals may enjoy benefits that they do not pay for.
Three main factors help facilitate collective action: ease of communication and enforcement,
clear property rights to economically valuable resources, and members' high educational
and informational status.
Collective action becomes easier if group sizes are small, benefits concentrated,
communication easy, and enforcement of sanctions possible at low cost (Olson 1971). The
potential for collective action can be enhanced if, in addition to the public good, clubs-
which can range from neighborhood associations to political parties-can provide an
excludable by-product (for example, legal or tax advisory services, or towing for cars) to
members and tie delivery to member contributions. Collective action can also be easier for
groups formed on the basis of identifiable characteristics or social ties, which can create
barriers to entry and enforce rules at low cost.
Owning economically valuable resources can further effective collective action.
Clearly, wealth increases the owner's ability to spend resources to attain political ends. But
wealth also affects attitudes toward risk taking. If absolute risk aversion declines with
wealth, the poor will be more risk-averse than the rich. Even if they enjoy equal potential for
collective action and equal pressure production technologies, they will invest less in
lobbying for any given reward. The poor will thus be taxed at higher rates than wealthier
agents if tax rates are determined by democratic bargaining between income groups
(Aumann and Kurz 1977).
The risk aversion effect on taxation will be stronger if the poor have higher discount
rates because of imperfect financial and insurance markets, and inferior risk-diversification
options, for example, if they lack nonagricultural sources of income or do not have a strong
25
social network. That discount rates vary with wealth and income has been confirmed
experimentally for landless workers and farmers in South India (Pender 1992).
The educational and informational status of different interest groups affects their
ability to evaluate the impact of any given policy or program on their welfare. With low
levels of education, it is difficult to detect misinformation (in the form of ideology or
"obfuscation") that may be spread by other interest groups. High levels of education,
informational advantages, and the ability to appeal to popular ideologies, by contrast, can
greatly enhance a group's ability to appropriate resources for itself.
Clearly observable and distinguishable group characteristics, in addition to furthering
collective action, can facilitate discrimination-using characteristics such as cultural identity,
class, gender, race, or skin-color as proxies for economically relevant traits such as skills.
Historically, discrimination has been used to create and maintain privileges for certain races
and cultures, and to hide the real economic costs of existing privileges.21
The continuing importance of discrimination is confirmed by studies that demonstrate
the existence of systematic wage differentials that are not related to relevant performance-
characteristics, such as schooling or individual ability. Psacharopoulos and Patrinos (1995),
for example, document such differentials for Brazilians of African origin (who make up much
of the poor rural population of the northeast) and for Indian groups in several Latin American
countries (which are over-represented in poor peasant populations). Observable wage
differentials may, of course, be compounded by the fact that certain groups are denied
equal access to economic opportunities, such as education, markets, or credit, a factor that
could-through unequal access to education and its returns-lead to persistence of such
differences across generations. Rural panel data from South India, for example, show that
higher caste status and male gender are associated with better access to education, even
21 Roback (1990) illustrates that in many cases racial differences that had fallen into oblivion were resurrected to
legitimize privileges that had no objective justification. Akerlof (1985) shows that sorting on the basis of group characteristics
can be dynamically stable, even if the key characteristics are completely unrelated to individuals' relevant
performanceattributes.
26
after correcting for schooling of, and inheritance from parents (Binswanger and Singh
1 994).22
Finally, since forming interest groups involves costs, the evolution of the social and
institutional environment should involve accumulation processes similar to those discussed
above for physical capital. Theories of social capital formation explore characteristics of the
social and institutional environment formally (Durlauf 1992). They demonstrate that initial
differences in the quantity or quality of social capital, such as trust, affect the ability of group
members to accumulate factors of production and can lead to stratification that is socially
inefficient and very difficult to reverse (Benabou 1994). Conversely, destroying social
capital and traditional institutions, by, for example, forcibly eliminating communal land
tenure as occurred in much of Central America in the 1870s, may have long-term impacts
far beyond eliminating the risk diversification and safety-net functions discussed earlier.
The importance of these factors in interest group formation has been confirmed by a
number of studies (Bates 1983; Magee, Brock, and Young 1989 Swinnen and van der Zee
1994). Gardner (1987) has quantified and evaluated these factors for the United States in
an econometric framework, in order to explore the interaction between collective action,
material conditions, and the general characteristics of the economic environment. Spatial
concentration of production of a specific commodity and lower variability of production (both
of which reduce the cost of communication and organization) lead to greater protection.
Higher output per producer, which would make it easier to form a pressure group with fewer
members, does the same. A high rate of output growth, everything else constant, makes it
more profitable to invest resources in productive rather than redistributive activities, and in
less distortionary policies (observations show that distortionary policies are less likely to be
applied to fast-growing commodities). Regional shifts of production create divergent
interests between "old" and "new" producers, and therefore reduce their ability to lobby for
transfers. Finally, commodities that face import competition receive more protection
22 In most cases wage equations have been estimated using cross-sectional rather than panel data, and do not therefore
correct for unobservable individual attributes. The South Indian panel data enabled accounting for both unobservable fixed
household effects, as well as correction for parental endowment effects, and therefore represent stronger evidence for the
persistence of discrimination.
27
because import tariffs or quotas do not require budgetary outlays or taxation of producers;
instead, a large number of consumers bear the costs.
The framework of collective action described above helps identify and define the
groups that would likely form and act collectively to influence agricultural and agrarian
policies. The groups fall into three broad categories: agricultural producers, rural elites, and
urban dwellers.
Agricultural producers are separated by large physical distances, which
makes communication difficult, unless infrastructure-such as roads or telecommunications
systems-is well developed. Furthermore, since agricultural activities are seasonal, the
potential for concentrated collective action is limited to the slow seasons. These limitations
are most pronounced for peasants and other small producers who are widely dispersed,
produce a variety of heterogeneous goods for home consumption and the market, are
lacking education and access to infrastructure, and lack strong social ties. Poor rural
women are less mobile than men, which is important when their interests do not coincide
with those of men, as in the allocation of land rights. To the degree that small farmers are
racially or culturally distinct from dominant groups, discrimination would likely further reduce
their potential for collective action and make them more susceptible to taxation, as
illustrated by a wide range of historical evidence. The differences in income and wealth
generated by discrimination and differential accumulation of social capital in turn reduce the
political action potential of the groups suffering from discrimination.
* Rural elites are able to overcome the disadvantages of spatial dispersion
because they are smaller in number; have greater wealth and education, market
participation, and social integration; and have greater access to modern communications
technology. Their knowledge of agricultural conditions also gives them an informational
advantage relative to urban groups. If they produce a specific (geographically
concentrated) commodity, they may be able to supply and withdraw favors. This enables
them to form clubs that are potentially valuable partners for urban interest groups, even if
the two groups often have different economic interests.
28
* Urban dwellers benefit from spatial concentration, the relative unimportance
of weather risks, and freedom from seasonal work cycles. Formal urban workers, especially
those who work for large firms or for agencies that deliver public services, can use the
organizational structures of their firms for collective action. They also enjoy steady incomes
that make them less vulnerable to risk. They have a strong economic interest in low food
prices and are able to organize highly visible manifestations of discontent, such as strikes.
Informal urban workers, by contrast, generally have few assets, little education, and small
and unreliable incomes. Yet because they are concentrated spatially, it is still easier for
them to mobilize than it is for peasants. Urban commercial and industrial elites enjoy all the
advantages of the rural elites, but without the disadvantages of spatial dispersion and
covariance of risk. Bureaucratic elites share these advantages and may also benefit from
social ties arising from common class origins and educational experiences. Sometimes
they are formally organized into administrative corps, further lowering their cost of
organization. In addition, they have privileged access to information and to the enforcement
mechanisms of the state.
5.3 Choice of policy instruments
The framework under which lobbying can be "socially efficient," outlined by Becker
(1983, 1985), can also help explain the types of instruments chosen to redistribute
resources in the political arena. First, it is often much easier to transfer resources in the
political arena when the transfer does not involve a visible exchange of money. Thus,
politically, it is easier to transfer resources through distortionary trade, pricing, or tax policies
than through policies involving less distortionary direct payments. That is why it has been
so difficult to decouple income support to farmers and production decisions in industrialized
economies, even though direct income support would enhance overall welfare.23
Second, politically motivated transfers of resources are more acceptable if they can
be administered within existing institutional mechanisms, rather than by creating new ones.
23 A shift to overt support for farmers through transfer payments that are financed from the regular budget, rather
than through price policies financed by all consumers, may be resisted because it would be less regressive, falling more on
higher-income earners who are more vocal politically.
29
The potential to use existing organizational structures or organizational residues to
redistribute resources is particularly great in the agricultural sector. Numerous institutions
of supply management and price stabilization (marketing boards or buffer stocks) that had
been established during times of war or commodity price collapses, with the goal of
ensuring food security or supporting producer prices, have subsequently been converted
into agencies whose primary purpose shifted increasingly toward transferring resources to
powerful lobbies (Krueger 1992).
Third, appealina to popular ideologies enhances the political feasibility of
redistributive measures.24 For example, in many countries redistributive measures have
been justified to attain food security, agricultural modernization, environmental protection, or
economies of scale in agricultural production. Yet innumerable studies show that few
policies meant to promote food security actually benefit poor or hungry households.
Conversely, the use of ideologies enabled socialist governments to establish state farms or
collectives, and enabled many capitalist governments to direct scarce resources toward
supporting large haciendas, despite considerable theoretical and empirical evidence
demonstrating the efficiency advantage of family farms.25
6. THE INSTITUTIONAL AND POLITICAL ENVIRONMENT
In this section we discuss how the insights from the previous sections can help us to
understand the evolution of the institutional and political environment, (equation 3) and its
impact on political outcomes (equation 4). We discuss institutional economics and the
historical literature before shifting the discussion to recent class-based approaches.
24 It is not clear to what extent ideas and ideologies are used to bring about political and policy changes, rather than
to merely legitimize policies that would have been adopted anyway because of interest group pressure. Nor is it clear to what
extent ideas and ideologies facilitate the spread of specific policy mixes across countries. The literature on agricultural policies
and agrarian relations does not address these issues. Further research is needed.
25 The substantial empirical evidence assembled by Chayanov. shows that the high productive capacity of peasant
agriculture had no impact on the policy of collectivization of the Soviet Union in the late 1920s, but was instead suppressed
(Thorner, Kerblay, and Smith 1966). Similarly, the considerable evidence indicating the negative association between farm size
and productivity generated during the 1960s and early 1970s (Binswanger, Deininger, and Feder 1995) had no influence on the
agrarian strategies that were adopted in many Latin American and or southern African countries.
30
6.1 Institutional economics
Institutional economics is concerned with why institutions vary so much across space
and why they change over time. Institutional economics sees the state as a rational device
created to reduce the transaction costs that arose once economic relations became too
complex to be handled within personalized networks of exchange (North 1989, 1990).n
Transaction costs include costs of measuring the attributes of goods or services, specifying
the nature of exchange between parties (the contracting technology), and enforcing
contracts. The state reduces transaction costs by providing public goods, such as
impersonal rules of exchange and institutions that enforce laws.
North points out that under certain material, political, and economic conditions, which
form transaction cost constraints, states are not established, even though this would be
economically beneficial. Instead inefficient institutions are adopted. These conditions
include barriers to collective action within a given social organization, high fixed costs and
risks of establishing or transforming institutions, and networks that provide disincentives for
individuals or groups to adopt new rules of the game unless most others do the same, and
(d) preferences that are based on ideologies.
Competitive constraints, which arise when economically powerful groups from inside
or outside the state are able to contest and challenge the ruler's legitimacy and monopoly
on power, may also lead to the establishment of suboptimal institutions.27 While competitive
constraints may limit the potential for rulers to arbitrarily exploit their subjects, they may also
give rise to anarchy and chaos, a weak state characterized by stagnation and poverty, and
the dissipation of resources rather than investment.
26 In economies characterized by personalized exchange relationships, trust-based "contractual technologies" rely on a
dense communication network, common ideologies, and a set of rules to which all adhere. The personalized networks are
sufficient to maintain the optimal level of economic activity. However, with increased volumes of exchange, personalized
networks become less efficient means for economic activity and trade.
27 The concept of competitive constraints is closely related to that of contestable monopoly (Baumol, et al. 1982).
31
In North's framework institutional change is closely related to changes in relative
prices or in ideologies that alter the political bargaining power of different groups.2s Changes
in real prices occur because of exogenous changes in material conditions, such as changes
in population density, productive or military technology, or trade. The relative bargaining
power of different groups shifts with exogenous changes by enabling groups to win higher
payoffs through recontracting, or by challenging the fairness of existing contractual
arrangements. Thus changes in prices and material conditions directly affect political
outcomes.
The historical material discussed in the next section explores these ideas in much
greater depth, and examines the role of material conditions, and the impact of changes in
material conditions on the political power of interest groups and class alliances.
6.2 State formation
A well-functioning and stable state in which all interest groups are represented and
can interact freely must exist before efficiency-enhancing policies can emerge. How do
such states arise? What influences their characteristics (lower left hand quadrant in Figure
1)? In this section, we explore how material conditions strongly influence state and
institutional characteristics. To understand the political economy of rural areas it is
essential to go beyond agriculture.
Like other institutions, states are formed because they are useful to specific groups
of economic agents. To focus on the relationship between material conditions and the
nature of states, it is useful to adopt a broad comparative perspective, as in Tilly (1990).
Tilly defines states as organizations that control the principal means of coercion and armed
forces in a population that enables them to attack external and internal rivals in order to
promote the states' (or the ruling groups') interests, requisition needed resources from
2S Ideology is defined as the willingness of individuals to pay for their convictions. The relation to the relevant
economic variables, that is, the ability to pay, is not drawn. This definition ignores the fact that ideological convictions matter
little as long as they are not accompanied by the (economic) power to enforce them. Even the abolition of slavery, often
attributed to a shift in ideology, occurred only when the power to enforce the new law became available.
32
subjects, and ensure a minimum acceptable supply of food, means of production, and
economic well-being for the people.
In this framework an issue of critical importance is whether states acquire the
resources necessary to function through extractive or through representative institutions.
Extractive institutions rely on coercion, yield relatively little revenue, and, most importantly,
do not encourage private investment-and thus do not instigate a virtuous cycle of growth
and increased provision of public goods. Such virtuous cycles arise only where
representative institutions, such as parliaments and courts that limit the power of leaders to
arbitrarily change rules or expropriate resources, have been established. Then, strong
institutions, such as secure property rights and impartial enforcement of contracts,
encourage investment by private individuals and facilitate sustainable growth.29
What are the conditions that facilitate the formation of representative rather than
extractive institutions? One recurring theme in the historical literature is that representative
institutions were more likely to arise when a reasonably well-defined and stable government
was faced with fiscal crisis. To meet the associated resource requirements, ruling groups
often had little choice but to agree, through bargaining, to the establishment of
representative institutions in exchange for resources (Tilly 1990).3o Throughout history, this
has been the main reason representative institutions were created. A second issue of great
historical relevance is that, once established, institutions, ideologies, or organizational
structures often acquired a life of their own and remained in place even after the groups that
had created them or the material conditions that led to their formation had disappeared or
29 Historically, representative institutions became important as changes in technology made war increasingly capital-
intensive which necessitated the establishment of costly standing armies. Even in centralized states, such as France or Prussia,
which had managed to limit the power of representative institutions for several centuries, representative institutions acquired
more power with respect to the crown as regular taxation, credit, and payment of the national debt became essential for the
maintenance of the armed forces.
30 A formal description of such bargaining and the set of possible solutions is presented in Hong (1987) and Skaperdas
(1992).
33
changed. Such organizational residues continued to affect economic behavior and
allocation of public resources.31
While bargaining between interest groups is the decisive mode of interaction when a
state exists, material conditions and factor endowments determine the range of feasible
production and military technologies, thus limiting the degree of specialization that is
possible and the nature of the state that can emerge. Three main categories can be
distinguished: domestic, capital-intensive, and coercion-intensive societies.
* Domestic societies. These are based on villages and social structures that
operate without or on the margins of states and are characterized by smooth and
uninterrupted, but slow transitions to more productive forms of agriculture and secure
individual property rights in land (Boserup 1965). Societies undergoing this sort of
transformation were limited to isolated areas with low agricultural or mining potential, and
relatively low population densities. Examples include Argentina until the nineteenth century,
Colombia, Iceland, and Papua New Guinea-regions that were relatively isolated, with too
few resources to interest foreign powers-and Jos Plateau in Nigeria or the central cantons
of Switzerland, territories that were easy to defend. In all these regions low population
densities, a lack of goods for export, and consequently little economic specialization led to
the creation of very small political entities with little formal administrative structures and
relatively egalitarian societies that remained largely outside broader economic or political
systems.32
31 An important type of such residues are institutions that had been established to cope with fiscal or food supply
crises during times of war. Instead of being dissolved after the war, they acquired new functions. In the industrial and
developing world the origins of a number of state institutions for managing food supplies can be traced back to the great
depression and World War II. In developing countries marketing boards and state-owned marketing organizations for key
commodities such as sugar, and a large number of food parastatals fall in the same category. The changing purpose of such
institutions-from price stabilization, to financing of the war effort, and finally the continued taxation of small producers-is
well-documented (for example, Helleiner 1966, Krueger 1992).
32 There are two main types of domestic societies. Meillassoux (1981) shows that where climatic risk is low, such as
in the subhumid and humid tropics, societies are relatively unstratified, composed of loosely connected family-clans.
However, where covariate environmental risks are high, societies have hierarchical social structures dominated by elders. In
arid and semi-arid environments the survival of households depends on grain storage, a task best entrusted to elders, who have
experience evaluating the risks and consequences of failing to manage stores carefully and who possess the social status to
enforce decisions. Binswanger and McIntire (1987) have further extended this analysis.
34
* Coercive societies. Coercive societies are characterized by low economic
specialization, low investment, and highly coercive political structures, led by either an
external power or domestic ruling class or nobility. Coercive societies arose where
population densities were low, land was abundant, and populations were spatially
dispersed-and where a state was able to impose itself on local populations. Their
formation can be explained as follows (Tilly 1990).
First, since specialization was limited and land was abundant, collecting taxes
required coercion. Thus much tax revenue was dissipated on military action rather than
spent on public goods or invested in productive enterprises.
Second, the spatial dispersion of the population meant that a central ruler had to rely
on intermediaries to collect taxes. The tax collectors maintained independent armies,
acquired considerable power, established sizable fiefdoms. and often amassed substantial
wealth-at the expense of the central ruler who was reduced to heading of a loose
federation. A central ruler had to strengthen his position by increasing competition for or
monopolizing access to the elite, or through central enforcement of a legal code-an option
that was available only where loyal enforcing institutions, such as a bureaucratic corps or
the military, existed.33
Third, in areas with low population densities that produced goods primarily for export
(minerals or agricultural outputs) rather than for domestic consumption, it was often very
difficult to recruit laborers. Since land was abundant, the native population had little reason
to work in the mines or the large farms unless they could earn more than they could on their
own farms. Four solutions were used to solve the problem of labor shortages: attractive
incentives were offered for immigration (Prussia, United States); slaves were imported on a
large scale (Brazil, the Caribbean); indentured laborers were brought in from labor-abundant
countries such as India, China, and Ireland (United States, the Caribbean, Fiji); or the
33 In Russia the central ruler strengthened his position by enforcing legislation to stop individual landlords from raiding
each other's labor forces. He endorsed laws requiring the return of escaped laborers to the original owners, actions that would not
normally be taken by the producers. Given the prevailing labor shortage, it would have been more profitable for them to employ
the escaped workers themselves.
35
reservation utilities of independent peasant producers were reduced through taxation and
discriminatory interventions in factor and product markets (Kenya, South Africa, Peru).
While the first action was not directly coercive, the other three-which involved
measures such as taxation, limitations on economic opportunities, restrictions on spatial or
occupational mobility, or overt discrimination-depended on strong coercive power.
Regardless of their form and primary purpose, the economically most important and lasting
effect of these measures was their impact on the ability and incentives to accumulate
physical and human capital. They severely reduced efficiency and productivity growth, and
in many cases left institutional legacies and organizational residues that outlasted the
groups that had created them or the material conditions (such as low population density)
that originally led to their introduction. 34
For example, it has been argued that the Indian caste system originated to reduce
the potential for peasants to establish their own farms on unsettled land where land was
abundant. The discriminatory institutional structure that developed remained even after
population densities had increased, raising the scarcity value of land and making it possible
to collect land taxes without coercion. The caste system, along with the continued
extraction of a large proportion of farm output from the peasantry, resulted in severe
agricultural stagnation: yields in most of Indian agriculture in 1970 were little different from
those of 2000 years earlier (Lal 1988).
There are many examples of coercive institutions which arose in colonies where land
was abundant, for example in Nigeria in the nineteenth century or Brazil, Prussia, Russia,
and South Africa much earlier. To maintain control over widely dispersed populations,
central rulers "co-opted landlords and clergy, subordinated the peasantry, built extensive
bureaucracies, and stifled their bourgeoisie" (Tilly 1990). Not surprisingly, these colonies
34 Community institutions often remained the foci of popular life and potential bases for resistance against the power
elite, as long as there were no alternative representative institutions through which the elite could be held accountable. In both
England and France the importance of community institutions declined once households were able to appeal to independent
national courts to define and enforce their property rights, suggesting that the development of accountable and predictable rules
governing the exercise of elite power are necessary, though not always sufficient conditions for the transformation of
community-based institutions (Magagna 1991).
36
were characterized by low levels of private investment, relatively high levels of resource
dissipated in internal power struggles, and a large role for the state and the military.
0 Capital-intensive societies. These societies are characterized by high levels
of private investment and the existence of representative institutions, which often emerged
through lengthy bargaining between groups of comparatively equal power. Examples
include city-states, such as Venice or the Low Countries, which initially prospered from
cheap transport by sea and relatively high population densities (Tilly 1990). These societies
obtained the bulk of their revenues from taxes on trade and achieved a relatively high
degree of independence from agriculture and landlord interests. Furthermore, the relatively
low cost of communication, the organization of subjects into trading organizations (guilds),
and international competition between different trading centers made it difficult for the rulers
to extract taxes and made investment in public goods more desirable. Establishing
representative institutions was by no means a smooth process, generally involving lengthy
bargaining between rulers and subjects. 3 As the state became increasingly dependent on
revenues from individual entrepreneurs making decentralized investment decisions in
increasingly integrated financial markets, it became perilous for rulers to adopt obviously
growth-reducing policies.
The bargaining power of subjects and the establishment of representative institutions
advanced greatly where a state's financial crisis required an immediate solution. The much-
quoted case of the United Kingdom shows how this occurred (North 1989; Tilly 1990). For
centuries neither the king, the merchant elite, nor the landlords were able to establish a
clear supremacy of power. Through the concentration of commercial activity in a single
location, London, the commercial elite established a strong power base. Because
population was low-density and high dispersed throughout the rest of the country, the king
depended on powerful intermediaries to collect taxes and maintain law and order. Given
35 For example, in Genoa most of the population was initially excluded from the benefits of trade and economic
development, leading to political instability, civil wars, and low growth. Exogenous shocks in the form of repeated foreign
aggression triggered policy reforms that established a representative form of government and, through the separation of
legislative and executive power, brought about greater security of property rights. This change led to a spurt of technological
and organizational innovations, and rapid increases in trade volume that soon made the city a major economic power (Greif
1994).
37
these conditions, fiscal crises that brought the monarchy close to bankruptcy forced the king
to concede political and legal rights to the landlords and merchant elites in return for their
support, leading to the establishment of independent institutions.36 Once a parliament had
been established that represented the political views of the three interest groups, the king
lost his power to control redistribution, and thus his power to adopt growth-reducing
extractive policies. Still, while the bargaining between politically vocal groups prevented
adoption of the most obviously efficiency-reducing forms of taxation, the new system did
have a negative impact on nonelites. The peasantry lacked political representation, paid the
bulk of the taxes, and lost most of their land rights in the process.
The more recent literature on policy reform supports the general view that reform
attempts are most likely to be initiated and succeed when the state is facing fiscal crisis,
and that efficiency-enhancing policies will be sustained only when groups that benefit from
the policies defend them against pressure from groups that benefit from the alternatives.
Becker's model, emphasizing the importance of equal access to "lobbying technology" by
contenders as a precondition for constrained-efficient outcomes, is the counterpart of this
set of historical findings.
6.3 Class-relations
Some of the most complete and insightful descriptions of the patterns found above
are discussed in a large literature inspired by historical materialism. Within this framework
of analysis, self-interested classes-defined as groups of individuals who, given their
ownership of productive factors such as land, labor, and capital, behave in economically
similar ways-are the main political and economic actors. The material determinants that
govern relations of production, surplus appropriation, and the interests and power of classes
are described in detail, and the state is viewed as an instrument that serves the economic
interests of the dominant classes or ruling elites. Political decisionmaking mechanisms are
36 In Spain, by contrast, where the colonies offered the possibility of almost unlimited resource extraction through
repression and physical force, there was no pressure to prevent the emergence of an extremely wasteful apparatus of
unproductive bureaucrats, which eventually reduced economic growth directly and indirectly.
38
used or altered by the dominant classes to further their economic interests. Ideology is not
an independent factor but a policy tool.37
The most elaborate and original application of a Marxist framework to explain
relations of production in agriculture at the periphery of the industrial world has been
provided by de Janvry (1981). He shows how in Latin America class alliances led to the
establishment of dualistic structures characterized by a concentration of industrial
production on luxury goods and dependence on imports for other goods, such as capital
and basic consumption goods. In this situation of economic disarticulation "development"
was equated with minimizing labor costs, leading to regressive and repressive labor
policies, and proletarization of labor.
De Janvry (1981) shows how these patterns of development led to stagnation,
impoverishment, and destruction of peasant and artisan spheres. These outcomes came
about through several channels: the import-substitution strategy for growth depended on the
import of capital goods and technical knowledge, which drained resources from the
domestic economy; savings rates were low and the market limited, so capital for investment
had to come from heavily taxed peasant and artisan sectors; to keep wages in the export
sector low, food prices were kept low at the expense of small domestic producers; and large
farmers often received credit subsidies and other special benefits intended to bring about
rapid technical change and mechanization in the "modern" agricultural sector.
Thus a functional dualism emerged between the large-scale farms and the small
plots cultivated by farm workers or small landowners. These workers earned below-
subsistence wages on the large farms and fulfilled their subsistence needs with output from
their tiny farms. The two farm sectors were mutually dependent in a single dualistic system.
With population growth and mechanization (often subsidized), labor supply
outstripped labor demand, and peasant households tended to disintegrate. Workers and
37 Most Marxist theories assume a marked dichotomy between feudal and capitalist economies. In feudal economies
surplus is expropriated through direct coercion or control over labor, possibly backed up by distortionary policies. In capitalist
economies, by contrast, surplus can be expropriated even under perfectly competitive markets with voluntary transactions.
Roemer (1982) shows this to be a consequence of wealth inequality and credit constraints.
39
peasant families migrated to cities in search of work, where a protected modern sector
generating large profits and high wages for a few coexisted with a growing informal sector
characterized by low wages. Thus functional dualism was recreated in urban areas.
According to this view the main factor influencing the pattern of development prevails
is whether or not the bourgeoisie is aligned with or against the working class. Where the
bourgeoisie was weak, it joined forces with foreign capitalists and the landed elite against
workers, resulting in dualistic patterns of development. By contrast, where the bourgeoisie
was strong, it aligned workers and peasants against the landed elite, leading to articulated
development.38
Therefore, to de Janvry, increasing the political participation by the poor, by
enhancing their potential for collective action, is key to bringing about increased efficiency
and sustained and equitable growth. In the long run the only feasible way to achieve this is
to increase the productive capacity of the rural population. De Janvry strongly advocates
that governments increase their spending on schools and health care facilities for the rural
poor. to improve their ability to participate in the political process. But the adoption of such
"social pact" policies is itself a political decision. Few social pacts have survived in Latin
America for prolonged periods of time.
The Marxist analyses discussed above aim to explain the entire circle of economic
and political interactions presented in Figure 1. Yet they often fail to recognize sufficiently
that in predominantly capitalist systems there are a wide range of growth-reducing policies
that will, in the long run, not benefit any of the interest groups involved in policymaking. The
resource dissipation and economic stagnation so prevalent in many developing countries is
attributed largely to the peripheral role of these economies in the international division of
labor. Little attention is paid to the wide range of growth-reducing policies that would not in
the long-run benefit any of the interest groups involved in policy-making. This tends to
divert attention away from analyzing the impact of the distortions and from pursuing
alternative explanations of their origin. What needs to be better understood are the
3 Note the similarity to the discussion of the capital intensive path to state formation by Tilly (1990).
40
conditions under which rational pursuit of economic self-interest can lead to political
outcomes that are detrimental to growth.
Rueschemeyer, Stephens, and Stephens (1992), building on earlier work by Moore
(1966), further explain the role of political coalitions in affecting policy outcomes. General
policy outcomes are the result of a contest between (repressive) landlords, whose wealth
resulted from access to cheap labor and sometimes protection from foreign competition,
and a bourgeoisie whose interests were more closely aligned with broad-based economic
growth and democratic development. Rueschemeyer Stephens, and Stephens observe that
at early stages of development all over the world, large landlords derived their wealth from
cheap labor, the availability of which was assured by coercive legislation or discriminatory
taxation of free peasants. By contrast, the bourgeoisie were in an ambivalent position,
supporting landlords where they had originated in a landlord-based nobility, but aligning with
workers where they had not. Societies in which the bourgeoisie aligned with landlords were
often characterized by low product diversification, concentration on heavy industry, and
protection from foreign competition (upon which the nobility depended for its economic
welfare). Their transition to democracy was often hindered by autocratic and dictatorial
episodes. By contrast, societies in which landlords were never powerful (because of
material conditions) were characterized by a relatively high degree of mobility, high
specialization, economic growth, openness, and a smooth transition to democracy.
In this context an authoritarian coalition comprising the state, labor-repressive
landlords, and a dependent bourgeoisie was most likely to arise where economic activity
was concentrated in agriculture and a large number of the high-level bureaucrats came from
the landed class; landowners were economically more important than the industry-based
bourgeoisie (either because there were few industries or because landlords owned most of
them); the bourgeoisie was dependent on the state, which provided industrial protection or
cheap credit and infrastructure; and the peasantry had little or no ability for politically vocal
resistance or revolution because of material conditions, a past history of extractive taxation,
and the abolition of communal institutions.
41
7. THE ADOPTION OF GROWTH-REDUCING POLICIES
In this section we return to the key questions that motivate this essay: what induces
societies to adopt growth-reducing policies and why do such policies persist? Historical
analysis and the theory of public choice suggest that inefficient policies are likely to be
adopted when the conditions for competitive bargaining between interest groups are not
met-an issue that is closely related to material conditions and initial endowments of
specific groups. Here, we elaborate on this point and consider the importance of institutions
and organizational residues for policy formulation.
7.1 Initial conditions
An unequal distribution of initial endowments in environments where financial
markets are imperfect and credit is rationed can prevent a large proportion of the population
from making productive investments. In fact, a number of recent cross-sectional studies
have found a robust negative relationship between initial levels of inequality in the
distribution of income or wealth and subsequent growth (Alesina and Rodrik 1994; Persson
and Tabellini 1994; Deininger and Squire 1996). Several early studies sought to explain this
relationship as resulting from an unproductive but costly redistribution from the rich to the
poor which was imposed by the "median voter".39 However this explanation does not accord
with the observation that the poor are less likely than others to participate in the political
process and with the failure to find an empirical association between the degree of
redistribution and lower growth. Recent models that incorporate a richer set of empirical
regularities point to the possibility of multiple steady states, which are determined by a
combination of initial conditions and endogenous institutional arrangements in the economy.
Bourguignon and Verdier (forthcoming) develop a model in which political
participation depends on the educational status of a person (only educated individuals can
39 The argument is that the more unequal is the distribution of wealth or income, the further from the average will be
the median voter, and the higher is the tax rate he approves on wealth or income. The higher is the tax rate, the lower are the
incentives for the wealthy to invest in productive activities, and thus the lower is the growth rate of the economy. Societies
with very unequal distribution of wealth or income should therefore be characterized by high tax rates on the rich and low
growth.
42
vote). Because of the absence of capital markets, individuals with endowments below a
minimum level will not be able to acquire human capitaleven though it is privately
profitable-unless they receive an education subsidy. They will not therefore be able to
participate in the political process. Educating the poor will always result in higher growth.
But, educating the poor will lead to the ultimate loss of political control of the oligarchy (the
class of individuals with the means to privately finance education). Depending on the initial
distribution of income and the size of the educational externality (the benefits to society from
educating the poor), the steady state will involve a pure oligarchy with no growth, a ruling
oligarchy that accommodates a middle class without giving up power and moderate growth,
or a democracy with income redistribution and fast growth.
Benabou (1994) goes one step further, using a stochastic growth model with
incomplete asset markets. In his model the rich have more political influence than the poor,
and citizens vote democratically on proposed progressive taxation and redistribution
schemes. Thus redistributions that would increase aggregate welfare receive less political
support in societies with unequal wealth and income distributions than in egalitarian
societies (leading to further increases in inequality). Two stable steady states emerge, one
with high income and wealth inequality, and little redistribution, and one with low income
and wealth inequality, and higher redistribution. Economies with greater redistribution will
grow faster if the productivity advantage from reallocating resources outweigh the
distortions introduced by redistributive taxation.
What is common to these models is that initial conditions determine which of the
feasible equilibria will be attained. Without significant exogenous changes in these
conditions (including the underlying technical relationships, or the power structure within
society), it is unlikely that an economy will move from one equilibrium to another.
7.2 Lack of institutions
The importance of institutions can be explained in a context of self-interested
politicians who myopically or strategically pursue short-term goals, even when the resulting
policies would reduce long-term growth. The state's ability to commit to taking particular
actions can be crucial in a strategic setting (Rodrik 1992). A weak state, which has little
43
ability to enforce contracts or take actions, will systematically underprovide economically
desirable public goods and, at the same time, undertake politically motivated interventions
that are economically harmful. While all states may be using the same instruments, the
weak state consistently chooses wrong policies, encouraging rent seeking and unproductive
spending rather than productive investment.40
Evidence has accumulated over the past decades that macroeconomic stability, the
real exchange rate, and nonagricultural protection are major influences on agricultural
growth (Gardner forthcoming; Krueger, Shiff, and Valdes 1991). We therefore need to look
at the types of institutions that can ensure macroeconomic stability and an appropriate
foreign exchange regime.
A large number of empirical studies comparing institutions across countries show
that the existence of independent central banks and mechanisms that ensure budgetary
discipline, political stability, fiscal decentralization, and free trade are generally associated
with better economic performance, even if other factors are taken into account.
The existence of independent central banks seems to be consistently associated
with better economic performance (Cukierman, Webb, and Neyapti 1992). Independent
central banks have forced even countries of the Organisation of Economic Co-operation and
Development (OECD) to adopt sounder fiscal policies (Alesina, Grilli, and Milesi-Ferretti
1993). Furthermore, institutional arrangements, such as a "no deficit carryover" rule, and
expenditure limitations, such as those adopted in many states of the United States, are
strongly correlated with more rapid-and less costly-adjustment to unexpected fiscal
deficits, such as occurred during the economic downturn of the 1980s (Poterba 1994).
40 The importance of the state is shown by the example of Korea, which provides subsidies to industries. In contrast
to attempts in other countries, the subsidies have succeeded in stimulating productive investment, which appears to be related
to the government's ability to base the subsidies on transparent criteria and to credibly threaten to withdraw them in case of
noncompliance. Grabowski (1994) proposes a similar game-theoretic explanation, based on a game between a government that
provides investment subsidies and the private sector. In his model everyone would be better off in the long run if the subsidies
were invested. But, the firm with a sufficiently short time horizon would rather consume the subsidies and bribe government
officials just enough to make them collaborate, leading to a net loss for society. In a repeated game context, the credible threat
of immediate withdrawal of the subsidy can lead to a Pareto-optimal outcome.
44
Theory also suggests that free trade can reduce a government's ability to rely on and
benefit from monetary expansion, since monetary expansion affects exchange rates more in
open economies than in closed ones. A study looking at empirical evidence for 114
countries found that the degree of openness is highly and significantly correlated with lower
inflation, greater political stability, and greater independence of the central bank-thus also
demonstrating the mutually reinforcing character of these institutions (Romer 1993). The
result is robust for different subsamples, but vanishes for a sample containing only OECD
countries. This breakdown suggests that OECD countries have other institutions preventing
short-sightedness on the part of politicians.
A system of fiscal federalism can limit arbitrary behavior of the central government
(Casella and Frey 1992). Establishment of independent but accountable institutions at
lower levels of government can strengthen the state, while at the same time placing limits
on its ability to confiscate the wealth of its citizens by arbitrarily changing the rules of the
game (Weingast 1992). The more mobile are its citizens, the more important is competition
between different levels of government. But, this competition could be jeopardized if strong
and enforceable systems of accountability and monitoring by citizens and the central
government are lacking, leading to dominance of local institutions by the rural elite.
The term political stability has often been used to describe the presence of strong,
impartial, and accessible institutions; an unambiguous division of power between different
branches of government; and their mutual control and vigilance. Political stability promotes
private as well as public investment.41 Political instability will reduce private investment as it
directly or indirectly threatens the security of such investment. The empirical evidence
contains many examples of the close relationship between political instability, low private
investment, and low growth (Edwards and Tabellini 1991; Edwards 1994).
Political instability would also likely affect the nature of public investment. In strong
states rulers can invest in public goods that enhance growth. In weak states, the lack of
broad popular support and the inability to hold on to power indefinitely shortens the rulers'
41 Political stability is a necessary, but not sufficient condition for economic growth. There are many examples of
stable, but repressive states, which failed to promote investment or growth.
45
time horizons and forces them to redistribute resources as bribes to potential contenders
(Moe 1990; Wintrobe 1990). Redistributing resources may eventually require more revenue
than can be sustainably extracted from the farm sector, causing small farmers to revert to
subsistence production (or the informal urban labor market), and outputs and tax revenue to
fall. Additionally, the policies may lead to a collapse of foreign exchange reserves needed
to purchase imported inputs for agriculture and manufacturing, leaving the state with crises
of fiscal revenue, foreign exchange, and domestic output. Empirical studies have found
some evidence that government weakness played an important role in the accumulation of
foreign debt in many countries during in the 1980s (Ozler and Tabellini 1991) and that low
growth and political instability are mutually reinforcing (Alesina, et al. 1992).
Many developing countries inherited institutions that benefit ruling groups at the
expense of large portions of the population. The resources available to the elite-natural
resources, rents, revenues from commodity exports, and, often, outside economic and
military assistance-helped maintain productivity-reducing policy regimes for prolonged
periods of time and eliminated the budget constraint that is critical for the attainment of
optimal policy outcomes. This outflow made political leadership a highly desired source of
patronage and led to the dissipation of resources on a grand scale through rent seeking. In
such situations, domestic interest groups may fiercely resist the establishment of
independent institutions, such as judiciaries and independent central banks.
8. Policy change
How, and under what conditions, can policies that facilitate growth and reduce
inequality and poverty (equation 4) be enacted and sustained? Experience suggests that
external shocks do not generally trigger or lead to the maintenance of major growth-
enhancing policy reforms. Nor does internal revolt. However, if exogenous shocks lead to
a fiscal crisis of the state, then the resulting changes in the bargaining position of groups
can provide the opportunities to initiate reform and establish institutions that-possibly
irreversibly-change the character of subsequent political interaction between interest
groups.
46
8.1 Exogenous shocks
The impact of exogenous shocks depends critically on the fiscal position of the state
and the institutional and political environment. On the one hand, the state may wish to
compensate groups that are hurt as a result of the shock (Magee, Brock, and Young 1989).
On the other hand, negative shocks may reduce the state's ability to provide compensation,
thus decreasing the payoff to redistribution and providing an opportunity for comprehensive
policy reform (Drazen and Grilli 1993). The outcome depends on the state's overall fiscal
capacity. A government with liquid assets and an unrestricted ability to borrow can
compensate small groups hurt by adverse shocks or, conversely, initiate redistributive
policies in response to positive shocks. But, a government without such resources may be
forced to undertake policy reform.
It is not surprising that external shocks, such as changes in the terms or trade or the
cost of borrowing in international markets, result in unpredictable outcomes. An external
shock will have differential impacts on individual interest groups, depending on the nature of
the shock and the country affected. Interest groups will agree to changes only when the
result of the change would be better than the alternatives. Thus even when reforms would
enhance aggregate efficiency, they may be delayed if they are not acceptable to certain
interest groups (Alesina and Drazen 1991). Inequality in income, wealth, or composition of
assets may provide opportunities to some groups to hold out in the process of reform and
impose the cost of adjustment on others (for example, holders of wealth may shift assets
abroad to avoid an inflationary tax, an option not available to all). In highly polarized
societies, the rich may be able to wait until the poor are willing to shoulder most of the
burdens associated with reform.
This model can also explain other behaviors of individual economic agents or interest
groups. An industry hurt by an adverse shock will decide to lobby for compensation-rather
than adjust-if it expects politicians to react favorably to the request. The expectations of
the industry will depend on the past history of awarding protection to specific sectors, in
addition to the state's aggregate fiscal capacity (Brainard and Verdier 1994).
47
The effect of the population collapse that occurred with the Black Death shows how
identical exogenous shocks can have highly varied impacts. This catastrophe, which killed
between one-third and one-half of the population in Western Europe between 1350 and
1500 (most seriously between 1347-51), led to an improvement of peasant rights in the
western zone of Europe, but to a second enserfment and reduction of peasant rights in the
eastern zone (for example, Poland and the former East Germany). Brenner (1977) was the
first to suggest that differences in the institutional environments of the two regions may have
led to the different outcomes. The western zone, which was more densely populated, was
characterized by strong village institutions that developed to protect and regulate village
commons, and provided peasants with bargaining power to establish rents, the ability to
enforce rights of inheritance, and the right to elect village mayors and priests. These
institutions were independent of state control and could defend their rights against
incursions by landlords. By contrast, the eastern zone was characterized by a high degree
of centralization, the strong leadership of landlords, an absence of common lands, and little
tradition of protecting rights of peasants.
Evidence contradicts the hypothesis that external shocks, on their own, bring about
growth-enhancing policy refomis. Positive external shocks often did not lead to an
improvement in the fiscal position of governments. Where governments, rather than private
entrepreneurs, unexpectedly gained access to large amounts of export revenues, they were
often unable to either save the revenue inflows for use when the conditions returned to
normal or to resist political pressure for redistribution.42 Some countries experiencing
commodity booms went on spending binges that, in political environments characterized by
clientelism and lack of planning capacity, did not increase the long-term productive capacity
of the economy. Often, the exchange rate appreciation that accompanied the commodity
boom (Dutch disease) and government spending hurt agricultural producers, increasing
polarization rather than reducing it. Cross-country evidence clearly shows that in the vast
majority of cases commodity booms reinforced preexisting social, political, and economic
42 The only examples where such a result was at least partly achieved are cases in which the foreign exchange
revenues partly accrued to private organizations such as the coffee growers' association in Colombia (Cdrdenas and Pont6n
1995), or in Kenya (Bevan, Collier, and Gunning 1993).
48
divisions rather than reducing or eliminating them (Little, et al. 1993). In response to
negative shocks occurring later, governments often imposed import restrictions as they tried
to protect the import substitution industries founded during the boom (and possibly the ruling
party's power base)-a goal that prevented them from devaluing the currency. These
policies generally hurt the tradeable sectors (including agriculture), worsened existing social
inequities, and set in motion further rent seeking efforts and pressures for higher deficits.
Empirical and historical studies show that when external shocks trigger or aggravate
a fiscal crisis, changes in the institutional and policy environment often result. A fiscal crisis
makes the aggregate budget constraint more binding, reducing the potential for obfuscation
and other forms of misinformation, and increasing the bargaining power of groups that have
access to resources or information. However, reform efforts, once initiated, may not be
sustained.
A fiscal crisis can make it impossible for those in power to buy off or suppress an
emerging alternative coalition. Historically, state financial distress, a high degree of
intraelite competition, and a potential for mass mobilization have been identified as
important preconditions of reform (Goldstone 1991).43 Most developing-country reforms
were initiated in response to deteriorating economic conditions, such as balance of payment
crises, inflation, capital flight, and the obvious failure of the state to provide the social
services or favors demanded by politically influential groups (Bates and Krueger 1993). By
contrast, reform has often been avoided, or stabilization plans abandoned, where there
were alternative ways to avert crises, such as by increasing taxation of politically powerless
groups or by exploiting and selling natural resources. This is in line with the importance of
fiscal crises in eliminating well-established interest-group equilibria, as emphasized by
Olson (1993) and recently confirmed empirically by Ben-David and Papell (1995).
43 The endogeneity of these variables, which may be related to lack of economic growth and a high degree of
unproductive activity, is not explicitly considered.
49
8.2 Revolt
Exogenous shocks and resulting fiscal crises can trigger revolt. But revolt may also
occur independently, as illustrated by a number of theoretical models that focus mainly on
the use of revolt, or the threat of revolt, in a bargaining game between interest groups.
Peasants who are disadvantaged by existing policies are unlikely to initiate revolt without
strong coalition partners. Even if successful in achieving immediate demands, peasant
revolts have rarely brought about lasting reforms and improvements in peasant welfare.-
Successful peasant revolts occurred only when the state was weak or in fiscal crisis,
making it difficult for rulers to co-opt the revolutionaries and their coalition partners through
concessions, and making it possible for peasants to enlist powerful allies inside or outside
the state apparatus, in particular those with financial and military resources to support their
cause. Revolts were also more likely where the state had attacked peasants' collective
identity, where revolutionary leaders had promised tangible improvements and addressed
specific grievances, where the potential benefits and/or the probability of success were high,
and where other avenues of political articulation (or co-optation of a part of the peasantry)
were not available (Tilly 1990).45
Even if numerically superior, peasants' low potential for collective action makes it
virtually impossible for their revolts to succeed without militarily powerful coalition partners.
Such a coalition enables urban-based revolutionaries-who appreciate the access to food
I Revolt may take many forms, from passive resistance and small scale violence to massive rebellions. Persons or
groups harmed by existing policies often engage in passive or small scale active resistance by (Scott 1985). The theoretical
literature has recently explored these activities. If the poor do not have the ability to expropriate resources from the wealthy
through the ballot box, they may try to obtain resources by pilfering and other kinds of extralegal expropriative activities. If
the marginal return to banditry exceeds the marginal return to wage employment, landlords would favor distributing just the
quantity of land needed to prevent peasants from engaging in banditry (Grossman 1994). This may explain why in some
countries, land reform was undertaken only after more coercive means to ensure peace were no longer feasible. A similar
Nash "equilibrium path of land reform" can be derived by treating the power of landlords and peasants as exogenously given
(Horowitz 1993).
45 Elimination of the traditional insurance and judicial methods practiced in communal systems appears to be at the
root of many peasant revolts in the history of industrial and developing countries alike. Threats to communal tenure and
peasants' right to elect the village mayor and priest were a key issue in the German Bauernkrieg. In this case, the other
conditions for revolt were satisfied as well: other avenues had been tried unsuccessfully, the traditional establishment was in
financial crisis, its ideological basis was weakened by the Protestant reformation, and there was a potential for tangible
improvement in the material situation of the average peasant (Magagna 1991).
50
and the local knowledge of places to serve as a hideouts-to harness peasant discontent
through promises or coercion (Kriger 1992; Palmer 1977). Most revolutionaries, therefore,
supported programs that selectively met peasants' demands, such as those providing
access to land or eliminating legal discrimination. Additionally, states seeking to quiet
peasant unrest adopted such programs.
Rural discontent can, even without the threat of major revolt, cause powerful groups
to undertake limited reform and accept the associated loss of some resources. However,
such reforms are not necessarily socially beneficial, as is clearly illustrated by the failures of
poorly designed land reform programs and the modernization of hacienda systems in
reaction to the threat of massive peasant unrest in the early 1960s in many Latin American
countries (de Janvry and Sadoulet 1990).
Peasants' lack of potential for collective action appears to be responsible for the
almost universal failure of revolts to improve their welfare, even in cases where the revolts
succeed and are characterized by strong peasant participation. There are numerous cases
of measures being enacted after a revolt which directly favored the urban against the rural
population (Nicaragua), settled political cronies on marginal lands but provided little more
than promises for the rest (Zimbabwe), or simply avoided distributing land to individual
farmers because doing so would conflict with the ideological goals of the state (Cuba).
Because these measures were often associated with large inefficiencies-by forcing
agriculture onto an excessively capital-intensive path or by collectivizing farms-they did not
increase the stability of the postrevolutionary systems.
8.3 Factors that enhance sustainability of reforms
While a fiscal crisis is usually necessary for initiating reform, a politically vocal
coalition supporting reform is necessary to ensure that reform is durable and successful.
Sustained improvements in policy outcomes appear to have been limited to situations in
which the fiscal crisis led to the formation of institutions that allowed the participation of
more groups in the political process or increased individuals' ability to demand enforcement
of rules. In the context of fiscal crises technical advice, assistance that helps specific
interest groups articulate their demands politically, and provision of resources by outside
51
agents can strongly affect the outcome of the reform process. Reforms are more
sustainable when the outcomes are viewed as fair, rather than being challenged by losers.
* Character of supporting coalition. The durability of reform requires the
support of a coalition of groups benefiting from reform. Building coalitions is easier if the
distortions associated with earlier policies are large or groups benefiting from earlier policies
are weakened, a range of feasible policy options is available, the state has sufficient
technical and administrative capacity, and the reform effort is credible (Haggard and
Kaufman 1992).
The creation and strengthening of a coalition supporting reform appears critical to
ensuring success. Where potential beneficiaries are not sufficiently organized politically or
where there is little policy dialogue that allows the government to explain and fine-tune its
policies, reform programs often encounter great difficulties. Increased political
representation is particularly important where the beneficiaries of reform are peasants or
small traders who are dispersed and have little political voice.
- Institutions supporting fiscal discipline. Ability to exercise strong central fiscal
control, through the central bank and the ministry of finance is critical to maintairning
budgetary discipline, keeping inflation down, and preventing special interest groups from
undermining reform efforts.- For a number of reasons, the ability to exert such control is
greatly enhanced if reform is undertaken swiftly. First, rapid action is likely to return
economies to a growth path faster; step-wise implementation of reform can be justified on
economic grounds only if rapid action risks backlash and policy reversal (Wei 1991).
Second, quick implementation of reform allows an incoming government to use honeymoon
periods and signal its commitment, which enhance its credibility (Rodrik 1989). Third,
where reforms are implemented quickly, opportunities for interest groups to organize in
opposition are minimized.
46 Experience does not confirm the conventional wisdom that military regimes have an advantage in exercising such
control. The cases (Argentina, Brazil, Nigeria) where populist or ethnic cleavages frustrated military and civilian governments
alike, as well as examples presented in the literature on the coup-trap (Londregan and Poole 1990), caution against such a
romantic view of strong leadership.
52
* International support can make reform efforts more credible and provide
access to international credit and technical assistance (Santaella 1993). However, the
availability of international finance can also delay stabilization, for example, by propping up
an unsustainable regime. In highly polarized countries an important side effect of external
assistance may be the initiation of a comprehensive policy dialogue that includes the
opposition (Haggard and Kaufman 1994).
* Analytical capacity. In many reform efforts analytical capacity, often provided
by technocrats in enclaves isolated from political pressures, is indispensable for analyzing
the current economic situation, providing technically-sound solutions, and ensuring
continuous adherence to the reform effort. A necessary technical condition for the ability to
exercise fiscal control is that basic information on the economic situation is available and
that the incentive structures in the bureaucracy ensure impartial implementation.47
Combining macroeconomic stabilization, which produces large gains, with trade
liberalization, in which most of the social gain comes at the expense of well-defined interest
groups, has made policy reforms much more acceptable to citizens (Rodrik 1992).
Since policy reform presents risks for some individuals and groups, an important
issue is the provision of social safety nets.48 Providing a basic level of insurance for losers
greatly increases political support for reforms.49 Eichengreen (1992) argues that the
presence of social safety nets and investments that improved citizens' access to education
47 If policy reform requires significant reallocation of factors across industries, it is essential that the financial system
functions well. For Sri Lanka, Athukorala and Rajapatirana (1993) show that financial sector policies supported the beneficial
effects of trade liberalization on both the demand and supply sides. On the demand side, attractive returns on financial assets
encouraged people to save their increased incomes rather than spend it on nontradeables-which otherwise would have led to
premature appreciation of the real exchange rate and undermined the competitiveness of the tradable sector. On the supply
side, increased savings provided funds to invest in the export sector-as indicated by the increasing credit flows to small
enterprises.
48 Hardy (1992) argues that lack of social safety nets is the main reason for governments' inability to close obsolete
and inefficient state-owned enterprises. In many of the transforming economies state enterprises are the sole institutions
reaching the poor. This issue is even more important where sta,z-owned enterprises recognize their significance and behave
strategically.
49 Concerning the potential importance of insurance, Fernandez and Rodrik (1991) demonstrate that because the
beneficiaries of reform cannot be known ex ante, efficiency-enhancing reforms may not be adopted. Once reforms have been
adopted, the uncertainty is resolved. This can explain why reforms undertaken by autocratic regimes (Pinochet in Chile) may
survive even when the countries adopt democratic political regimes.
53
and health facilities were instrumental in bringing about a social consensus during the
reconstruction in Western Europe after World War II. The existence of social safety nets
weakened support for nationalist forces, prevented conflict between groups with long-
standing animosity, and led to rapid economic growth.53
The process of reforming agricultural policies has accelerated in the 1990s in the
developing world. The triggers have been fiscal crises. Enhanced international support
through the General Agreement on Tariffs and Trade (GATT) negotiations, from the World
Trade Organization (WTO), and from the World Bank and bilateral donors has also been
important. Still, reforms of agricultural and agrarian policies have often lagged well behind
general macroeconomic reforms and structural adjustment.
A recent study of six developing countries, chosen because of their commitment to
agricultural policy reform in the 1980s and early 1990s, shows just how difficult the reform
process has been and how incomplete it remains (Gardener forthcoming).51 This result is
not surprising: distortionary agricultural and agrarian policies are often fully consistent with
underlying material conditions and the prevailing features of the political environment. They
are frequently linked to organizational residues, such as commodity boards, parastatals, or
collective farms. Their elimination and overall agrarian reform would benefit groups who
have poor potential for collective action and who are hard to include in postreform coalitions,
such as peasants, the landless, or dispersed consumers. Both governments and
beneficiaries have limited analytical capacity to evaluate the economic impact of reform.
And the real impact of policies is easy to obfuscate.
E Eichengreen (1992) argues that the most important impact of the Marshall Plan for Western Europe was that it
facilitated a social pact and reduced the political instability that had caused individuals to "hoard commodities and withhold
effort." This provision of safety nets not only facilitated economic stability, allowed governments to balance budgets, and
removed the danger of confiscatory taxation that had caused potential investors to wait, but also provided critical support for
proponents of a more market-oriented, rather than command-driven economic approach.
1' The countries were Chile, Ghana, Honduras, Indonesia, Madagascar, and Mexico. The study also included New
Zealand, an OECD country, and Hungary, an economy in transition.
54
8.4 From taxation to protection: Is agriculture a special case?
A paradox that needs to be resolved is why countries of Western Europe, Japan,
Korea, and Taiwan have, during the past fifty years, enjoyed rapid industrial and agricultural
growth and dramatic reductions in rural poverty. Farms that rely primarily on the labor and
management of owner-operators dominate their agricultural sectors. Agricultural output has
risen dramatically in these countries in response to high real prices (usually above world
market levels) and other supports, turning most of the countries from net importers into net
exporters. Countries with the least comparative advantage in agriculture, such as Japan,
Norway, and Switzerland, have supported agriculture the most. The agricultural policies of
these countries have been modestly successful in supporting rural incomes, but they have
been costly to consumers and the state.
The shift of these Western European and East Asian countries to greater and greater
agricultural protection during the second half of the twentieth century illustrates how the
elements and processes discussed in this paper can illuminate complex political
55
processes.52 At the conclusion of World War II countries were left with a great number and
variety of policies, programs, and organizational residues put into place to manage food and
agricultural raw materials during the war. These could readily be put to different uses such
as agricultural protection and income support.
The land reforms implemented in Japan, Taiwan, and Korea led to rapid growth in
agricultural output and rural incomes. In all of the countries rising urban productivity and
incomes increased the opportunity cost of farming, and encouraged workers to migrate from
rural areas to cities. Reduced numbers of rural dwellers and rising incomes increased the
collective action potential of rural groups in general. Greater commercialization and
specialization of farming increased the collective action potential of narrowly focused
commodity-based groups. Rural-urban migration reduced the number of farmers, but did
not diminish the political representation of rural areas, since voting rules were not adjusted
to fully reflect changes in population distribution.
The commodity price boom brought about by the Korean War strengthened the
resolve of governments to maintain the security of national food supplies, further boosting
the political power of farmers. The food shortages of the early 1970s similarly spurred
countries to adopt policies to ensure national food supplies. Many of the policies initiated
during these years remain in place today.
In recent years attempts to reduce the distortions of farm policies have led to
adjustments in the Common Agricultural Policy of the European Union and the inclusion of
agriculture in the framework of the World Trade Organization. An in-depth analysis of the
factors contributing to these changes would be one important way of testing the empirical
usefulness of the principles outlined above. There seems to be a consensus that the two
main factors responsible for this change have been fiscal considerations (Gardner 1996)
and the establishment of international institutions, such as the GATT and the WTO, which
linked liberalization of agriculture to freer trade in other commodities.
52 A number of articles reviewed here (for example, Hayami and Anderson 1986) have emphasized that many of the
factors that have been discussed in this review have been very relevant in explaining the transition to higher production.
56
9. MAIN IMPLICATIONS
In this section we discuss implications under three headings. First, we ask what are
the key regularities, and how can they be explained better with the theories and empirical
evidence assembled in this essay? We then discuss how the systematic introduction of
these elements would change the appropriate policies for agricultural development and
agrarian relations. We conclude the essay with suggestions on how to further improve
knowledge in this area through theoretical and applied research.
9.1 Elements and regularities with explanatory power
The review of the literature shows that the political outcomes-which influence
agrarian relations and determine agricultural taxation, subsidization, and the provision of
public goods-result from political bargaining between interest groups, which usually takes
place within an economywide budget constraint. The decisions reached through bargaining
are more likely to be efficiency- and growth-enhancing when equally powerful interest
groups, which are aware of the aggregate government budget constraint and know the
economic implications of different policy options, participate; and when impartial institutions
facilitate participation of all groups in economic and political activities, and enforce
decisions. The greater is the deviation from these conditions, the greater is the potential for
efficiency-reducing outcomes. In addition, the costs will fall disproportionately on politically
underrepresented or powerless groups. The differences in the potential for collective action
and the degree of political articulation among groups involved in bargaining about
agricultural and agrarian policies is particularly striking.
0 Peasants' potential for collective action. Clearly, if other markets are
functioning reasonably well, organization of agricultural production in owner-operated family
farms would maximize production efficiency. Paradoxically, these family farmers are very
unlikely to act collectively. The material conditions of agricultural production-spatial
dispersion, seasonal work cycles, covariance of risk, and the associate market
imperfections under which family farmers operate-make it difficult for them to act
collectively and to be aware of the implications of different policy options. This difficulty also
limits their ability to use ideas, ideologies, and information and misinformation to their
57
advantage. The low potential for collective action among poor peasants explains why many
inefficient policy regimes persist. It also explains the striking inability of peasants to initiate
revolts in the absence of a nonrural coalition partner, and to transform successful revolts
into lasting political change.
* Rural elites' potential for collective action. On the other hand, rural elites-
whether nobility or large-farmer interest groups-have very high collective action potential,
as experience in both industrial and developing countries demonstrates. Rural elites have
often been able to secure privileges and avoid taxation, while small family operators have
not been able to do so. And when fiscal crises, food supply emergencies, or threats of
peasant revolts forced the state to implement reforms, rural elites were frequently able to
preserve their privileges. For example, rural elites were often able to steer policies and
programs meant to increase rural productivity into capital-intensive investment programs for
large farms, thus perpetuating inequality and inefficiency. Where urban groups
implemented low food price policies, programs to compensate farmers benefited rural elites
almost exclusively, to the detriment of rural growth and the rural poor.
- Variations in material conditions. Such variations in agriculture over space
and time, and in the associated imperfections in financial, insurance, and land markets have
powerful impacts not only on economic outcomes and accumulation processes, but also on
the political and institutional environment and a broad range of political outcomes.
Population density, in particular, has been used as an explanatory variable in many sections
of this paper. Material conditions do change, although slowly, through accumulation
processes. While the government's ability to alter the underlying material conditions is
therefore limited, there are many examples of how central government-financing of basic
health, nutrition, infrastructure, research and extension, and services can reduce the impact
of spacial dispersion, covariance of risk, and lack of knowledge-and enhance growth and
diversification of rural activity. In the process many of the market imperfections so prevalent
in rural areas of low-income countries are reduced.
* Institutional and political environment provides incentives to individuals and
groups to invest, accumulate, and engage in political activity. In particular, the presence or
absence of clearly defined rights to own or use property, and of independent institutions
58
affects the propensity and ability of different groups to engage in political bargaining and
rent seeking, rather than in productive activities. While in the long-run the features of the
institutional and political environment are endogenous, they also embody organizational
residues, which, at any given time, have independent impacts on the bargaining processes
that determine political outcomes.
* The negative impacts of inequality. The literature reviewed here indicates
that in environments characterized by imperfections in financial and insurance markets,
income inequality may help perpetuate poverty and dualistic development. Credit rationing,
imperfect insurance and land markets, and the lumpiness of investments prevalent in rural
areas limit the ability of the poor to acquire land, draft animals, machinery, and other
equipment required to operate even small farms. The same conditions often force poor
people to liquidate stocks of productive capital in times of distress.
Income inequality may also increase the likelihood that governments will adopt
policies and programs that reduce efficiency. There are three main reasons why. First,
inequality reduces the participation of the poor in political processes, both directly and
indirectly. This in turn, reduces the likelihood that the poor have access to education and
health care services, and other services that would contribute to growth. Inequality may
hinder the establishment of independent and impartial institutions, and the enforcement of
binding rules, because these might reduce the benefits of the privileged. Inequality makes it
easier for the wealthy to hold out in political bargaining, either directly through capital flight.
It therefore makes it more difficult for societies to respond quickly and optimally to external
shocks, rather than adopting growth-reducing policies, which, nonetheless, protect the
privileges of the wealthy.
* External shocks, the fiscal position of the state, and policy change. The
historical and institutional economics literature shows clearly how fiscal crises of the state-
often triggered or aggravated by an external shock-frequently bring about lasting changes
in policies and institutions. Fiscal crises, under certain conditions, force the state to devolve
some of its power to independent institutions in exchange for financial assistance to meet its
immediate needs. This devolution may give rise to independent legal, political, and
59
economic institutions, which subsequently have positive impacts on policy choices and
growth.
External shocks such as changes in the terms of trade can have widely varied
impacts, depending on the material and political environment, and depending on the fiscal
position of the state. In the event of negative exogenous shocks the state may attempt to
compensate influential coalition partners. If the state has sufficient cash reserves or access
to credit, it is able to assist them through the use of borrowing or temporary and relatively
nondistortionary transfers from fiscal resources. If, on the other hand, the government is in
financial difficulty, it may provide compensation by introducing distortions that have no fiscal
cost-for example, by allocating large tracts of frontier land or restricting the importation of
goods competing with those produced by coalition members. People who are not members
of the coalition pay the costs. Positive external shocks can also have negative
consequences. If a government has difficulty saving the temporary inflow, income
inequality is likely to rise, which may increase the country's economic and political
vulnerability to negative shocks.
Finally, under certain conditions the political and economic reforms brought about in
response to a fiscal crisis may not be stable. Policy reversals are most likely to occur when
the state has insufficient means to finance growth-enhancing public goods, social safety
nets, and transfers to politically articulated groups to reinforce support for reform.
Paradoxically, therefore, a fiscal crisis, the main initiator of reform, may also ultimately
mean that the reforms cannot be sustained. Rapid restoration of fiscal balance following
the fiscal crisis, and renewed access to international credit markets, are therefore likely to
be key to producing lasting reform.
External alliances. Because of the importance of fiscal crises in triggering
reform and because of the critical need for access to fiscal resources to sustain reform,
external firms, international organizations, or foreign governments that provide financial
resources, military hardware, or food to states in fiscal crisis have exceptional leverage in
shaping policy. Whether they encourage the adoption of growth-enhancing and poverty-
reducing policy changes depends on their motives and wisdom of those providing the
assistance.
60
9.2 Policy advice when policies, organizations, and institutions are
endogenous
Economists and international institutions generally advises countries to adopt
efficiency- or growth-enhancing policies. Nevertheless, it is well known that countries are
most likely to initiate reform when fiscal or foreign exchange crises make reform essential,
and, at the same time, weaken the state's ability to reward members of the coalition who
supported the old policy regime. When these conditions prevail, domestic or foreign donors
or lenders can use their financial leverage to persuade countries to adopt their policy
prescriptions. It is no accident that the World Bank, regional development banks, and
bilateral aid agencies adopted policy-based, quick-disbursing loans just as the second oil
shock created fiscal crises for many governments.
Consistent with conclusions of the literature reviewed here, studies examining the
impact of World Bank policy-based lending show that the reforms will not lead to sustained
improvements in policies unless they are supported by a strong postreform coalition. Thus
the World Bank's emphasis on "government ownership" of the reform agenda. Indeed, this
review suggests that bargaining equilibria among self-interested groups may often lead to
stable but inefficient policy outcomes. In these situations the leverage of policy-based
lending may not be enough to force adoption of first-best policies.
An additional complication shown in the literature review is that policies and
programs that are normally very desirable may not enhance efficiency under some material
conditions. For example, fully private land rights where population densities are very low
may not lead to higher efficiency and greater growth. In addition, material conditions may
affect the sustainability of reform: where population density is very low, rural elites are
strong and have ample opportunities to form alliances with other interest groups resistant to
change. Policy advice must take account of these complicating factors.
Policy advice should also be based on a greater understanding of the opportunities
for reform that are associated with crises, including-in addition to fiscal crises-political
crises caused, for example, by the threat of peasant revolts. Several of the successful East
Asian land reforms were reactions to communist takeovers following World War II, while the
61
less successful Latin American ones were associated with the Alliance of Progress following
the Cuban Revolution. The emergence of land reform programs in Brazil has also been
triggered by massive peasant mobilization, threatening a political crisis. It is during times of
crisis that urban elites may be more willing and able to check the power of rural elites.
Policy change, in addition to affecting efficiency and income distribution, also
modifies the bargaining power of interest groups and their ability to participate in the political
process. Successful land reform improves the political articulation of the beneficiaries.
Privatization of parastatals not only reduces fiscal costs and improves competition, but may
also eliminate organizational residues that could lead to the adoption of future distortionary
policies. Similarly, openness of the trade regime reduces the power of domestic interest
groups and encourages governments to maintain budgetary discipline. The international
institutions and bilateral donors should systematically consider these possible outcomes
when formulating their policy advice.
The importance of income equality. The finding that increased income equality can
generate superior economic and political outcomes leads to several conclusions. Primary
education and health services, especially for the poor, rural inhabitants, and women, are
important not only because they foster growth and help reduce poverty through several
well-known channels, but also because they reduce income inequality, and thereby
enhance the collective action potential of the poor. Safety nets are necessary because they
enable the poor to avoid liquidating their stocks of productive assets in times of crisis,
leading to more equal distribution of wealth-which is important for the political environment
in the long-run. Redistributive land reform not only gives land to more efficient producers,
but also reduces credit market imperfections, which lead to improved investment decisions
by the poor. Greater wealth also increases the ability of the poor to directly participate in
the political process.
In view of the importance of independent institutions for the sustainability of policy
reforms, it is not surprising that new types of policy conditionality in adjustment lending
programs have recently been introduced that focus on enhancing the power of independent
institutions-including the establishment of independent central banks and judiciaries.
Decentralization of political, fiscal, and administrative power may change incentive
62
structures for political participation and the ability of previously powerless groups to
participate, thus creating conditions for bargaining which are more conducive to efficiency.
Reforming local governments to allow for greater competition improves transparency and
reduces the power of rural elites to appropriate benefits. The rise of civil society institutions,
especially in a context of greater decentralization, leads to greater participation. Groups
that were previously unrepresented, such as small farmers, can become much more
involved in choosing and implementing projects that they benefit from. Participation also
strengthens the social capital of poor beneficiaries to influence policy decisions. Finally,
documenting and measuring the impact of policies, organizations, and public expenditures
on efficiency, growth and rural poverty are needed to reduce the possibility that interest
groups succeed in using misinformation and obfuscation as a political tool. But it is not
sufficient to produce the knowledge. Poor and vulnerable groups must have access to it so
that they no longer have to operate at a disadvantage.
9.3 Toward greater predictive power
We are a long way from being able to explain the differences between the four
groups of countries, and individual countries more generally. Instead, we have identified a
number of key factors that must form part of an explanatory framework. We have also
identified the factors and regularities that can be used to explain major changes in
agricultural policy and that need to be taken into account in providing policy advice. But our
knowledge is very limited in certain areas-for example, the impact of ideas as generators
or facilitators of policy change-and remains poorly integrated across subfields and schools
of social science.
Thus there is a great need to develop a more unified theory of a political economy of
agriculture and agrarian relations that can be tested empirically. Such a theory must be
embedded in the theories of institutional development, state formation, and political
decisionmaking, which deal with issues well beyond agriculture and the rural economy.
Insights from many disciplines and analytical traditions, from neoclassical economics to
historical materialism, provide important elements of such a theory.
63
How would one develop a better theoretical framework and test whether it is capable
of quantitative analysis and predictive power? Developing a theoretical framework is most
difficult when all changes in a country-the political and institutional environment, the
political and economic outcomes, and the material conditions-are endogenous. Partial
theories that try to explain only some elements can omit important explanatory variables, or
treat all the right-hand side variables as exogenous. These theories often lead to erroneous
attribution of causality, especially in cross-country comparisons. While it is possible to
circumvent this problem by using sequential approaches and taking the material and/or
political and institutional conditions as largely exogenous, unobserved or unaccounted for
variables (such as "fixed effects") may still undermine the analysis. In truth, only natural
endowments and external events are strictly exogenous.
One may therefore initially look only at the impact of changes or shocks in the
external environment on the policies, institutions, and programs of a country. Fully
modeling the long-term dynamics of political, institutional, and economic change-even
though desirable in order to focus on the long-run consequences of alternative agricultural
and agrarian policies-is a much more distant goal. Predictions of how the political
environment will change in response to external or exogenous shocks-including natural
disasters and changes in ideas, the potential for alliances, prices, opportunities for trade
and borrowing, and technology-can be tested. The first task, then, is to build a model or
theory capable of predicting changes in the political environment in response to external
shocks. For this job one can use comparative static models and take many of the material
conditions and features of the political environment as constant, even though in a long-term
dynamic model they will change-mostly as a consequence of the policy changes initiated
by a shock. The models could then be tested by an evaluation of how identical exogenous
shocks affect political outcomes differently in different countries, or in the same country at
different times, depending on the prevailing material conditions, social and political
environments, political institutions, organizational residues, and the degree of participation
of the major interest groups. This would lead to more insights on the role played by the
factors held constant in the analysis of shocks.
64
What are the key features of a predictive framework? It is clear that one cannot
analyze the impact of external shocks on economic and political outcomes just by looking at
agricultural producers or rural groups. First, distortionary and compensatory policies are not
confined to only traditional agricultural policies, but include a much wider range of rural and
non-rural policies, institutions, taxes, and expenditures. Second, because the economywide
budget constraint plays such an important role in whether or not policy changes will be
implemented and what the outcomes are, the framework must incorporate all of the key
actors who bargain over the political outcomes potentially triggered by a shock. This implies
that the analysis must include the small farmers (politically active or not), rural elites, urban
elites, urban organized workers, and the unorganized and usually politically uninvolved
urban informal sector. Third, the impact of shocks and policies on economic outcomes
should be analyzed using frameworks in which exchange rates, prices, interest rates, and
wages are endogenous. Otherwise, the impact of the shocks and polices on the incomes of
the participants in the bargaining game, and on the state's fiscal position, cannot be
measured accurately.
Such models cannot be built on the assumption that constrained maximization of
growth is being pursued, since the empirical evidence suggests clearly that agricultural and
agrarian political outcomes have often been much more inefficient and growth-reducing than
would be consistent with constrained optimization with distributional objectives. Any
modeling strategy must admit the possibility of such highly inefficient outcomes.
A model composed of the features discussed above would not allow for much
prediction of specific policy outcomes. In order to achieve greater predictive capability,
constraints must be added that limit actions by individual groups and the government-and
that thus therefore restrict the range of possible policy outcomes. These include the
constraints and regularities that have been reviewed extensively in the main sections of the
paper: material conditions of rural areas and the broader economies, the striking
differentials in the power of interest groups, regularities of bargaining processes, the fiscal
position of the state at the time when shocks occur, and the political and institutional
environment of the economy at the time when shock occurs.
65
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